Payroll tax advances

What it means

A payroll tax advance is the monthly instalment of an employee’s income tax, withheld and paid over by the employer as the payer of the tax. The employee is paid net of it and never deals with the tax office about this money.

It is not the final tax. The base is taxable pay: gross pay less the employee’s levies and less one twelfth of the non-taxable allowance where the employee signed the employee tax declaration. The rate has two bands, the lower one up to a monthly threshold and the higher one above it.

A tax advance differs from a withholding tax in that it is not final. A withholding tax is deducted once and that settles the tax on that income, whereas advances are added up after the year ends, compared with the actual tax for the whole year, and the difference is refunded to the employee or paid by them.

How it works in practice

The employer remits the withheld advance within five days of the payday and files the monthly payroll tax return by the end of the following month. The tax bonus is not remitted but deducted from the advance, so it reaches the employee in the payslip.

Once the year ends the advances are squared up: the employee asks for the annual reconciliation or files a tax return. That is where an overpayment shows up, typically with uneven pay or an unclaimed allowance, or else an underpayment.

An employee can sign the declaration claiming the non-taxable allowance for a given month with only one employer. So when someone joins we check whether they also work elsewhere with a signed declaration; if they do, we calculate the advance without the allowance and the employee settles the tax in a tax return.

What to watch out for

An expensive mistake is applying the monthly allowance to an employee who already draws an old-age pension at the start of the year and is not entitled to it. The tax office assesses the unwithheld tax against the employer as the payer, with a penalty, and the employer will struggle to recover it from the person.

An annual bonus paid in one go can push part of that month’s income above the monthly threshold for the higher rate. The higher advance evens out in the annual reconciliation if yearly income stays below the threshold, but the employee sees it as a payroll error and the firm has to explain it, ideally before payday.