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Withholding tax

Withholding tax - What is withholding tax?

Withholding tax (WHT) is an income tax that is paid to the government by the employer, rather than the employee.

Did you know that if you own a business and employ at least one person, you will need to provide a workplace pension? Read more about how to set up a workplace pension on our blog.

Withholding tax is also referred to as a retention tax and is paid from the source rather than the recipient. Each country has a different percentage of withholding tax. In the UK and Ireland, it is 20%, however, it can change depending on the circumstances of the payment.

Certain laws require that taxes be taken first before the money is paid out or used for any other purpose, to avoid the risk of unpaid tax during tax season. This is why employers are required to take out certain taxes before paying wages to an employee.

In the UK, the term withholding tax is not widely used, instead, pay-as-you-earn (PAYE) system is the standard for pre-payment of certain taxes. Australia uses the pay-as-you-go (PAYG) system.

Example of withholding tax

Let’s say Katie’s gross salary is £30,000 per year / £2,500 per month. Katie would not receive £2,500 every month, she would take home around £2,000, as 20% (£500) would be withholding tax.

The payments go towards income tax and national insurance payments in the UK. This prevents employees from having large tax bills when they file their tax return, as small amounts are taken from each paycheck.

Can I get withholding tax back?

When you file your tax return, if you’ve paid too much tax for the year, you will receive a refund. This is based on several factors including your total income, your tax code, the type of employment you’re in, and the length of time you had worked throughout the year.

When it is time to complete your yearly tax return, you will be advised if you paid too much tax based on your individual circumstances.

How is withholding tax calculated?

In the UK, tax codes are used to ensure that employees are paying the correct amount of tax. HMRC will provide you with your tax code, and your code may change if your employment situation or income changes.

Tax codes start with a number and end with a letter. The most common tax code for people who have one job is 1250L. The letter ‘L’ at the end specifies that you qualify for the standard tax-free allowance which is currently £12,500.

Tax and Debitoor

Debitoor helps you keep track of your company’s finances including income and expenses, and accounting reports such as the VAT report. You can easily create and send invoices and quotes to clients, record expenses with different categories, and keep track of all of your accounting needs within one platform.

You can also integrate with time tracking apps to easily record working hours to ensure proper payouts to employees.