How to apply changes to personal tax allowance to your payroll

With the new tax year comes new allowances, taxes, benefits and legislation that we payrollers need to be aware of. Something to keep in mind this year is the personal tax allowance – but how is this applied to your payroll?

Changes to personal tax allowance fixed until 2026

For the tax year 21/22, the personal Income Tax in the UK was increased to £12,570, while the threshold for paying the Higher Rate of Income Tax (40%) was increased to £50,270. As you might be aware this figure has been fixed until 2026.

If you’re manually running payroll, you will need to distinguish what tax rate an employee is paying (basic, higher or additional rate). Then the % of tax will need to be applied to individual earnings after the personal allowance has been applied.

Basic rate tax: the lowest level of Income tax paid above the Personal Allowance

20% tax on income between £12,571 and £50,270. Therefore, employees earning the maximum amount in this banding will pay tax on £37,699.

Higher rate tax: the middle tier of Income Tax

40% tax on income between £50,271 and £162,570.

Additional rate tax: the top rate of income tax for high earners

45% on income above £162,571.

Opt for software that does it for you

Clever payroll software will take into consideration legislative changes and their impact on payroll. That means goodbye manual calculations, applying tax codes and confusing tax banding. Instead, great software will recognise how much an employee is earning, where they sit in terms of tax banding and take into consideration their personal allowance, before applying taxation.

Ever get the feeling your payroll software is letting you down? Great payroll software should save you time and money. Check out our guide to great payroll software to see how your software measures up.