As someone who has just started paying tax for the first time, Jamie understandably wants to know how much tax he’s paying and how much money he’ll get to keep from his pay! For his second video project he sets out to explain how to understand your payslip. From understanding what your tax code actually says to finding out what is being deducted automatically and why; watch his video or read the transcript below.
As tax someone’s who just started paying tax for the first time, Jamie understandably wants to know how much money he’s paying and how much he’ll get to keep from his pay! For his second video project he sets out to explain how to understand your payslip. From understanding what your tax code actually says to finding out what is being deducted automatically and why, watch his video or read the transcript below.
Jamie explains –
Most people who are employed may not think about how much tax they’re paying because it gets automatically taken from their wages. This means everything you receive at the end of the week or month has already had tax taken out of it. Although your is calculated for you, I think it’s still important to understand what your pay slip is telling you so that you can make sure no mistakes have been made.
Your Tax Code –
- L is one of the most common tax codes and simply means you are entitled to the standard personal allowance for that tax year. I’ll explain more about this in a minute.
If you have more than one job or pension, you’re likely to see different letters.
- BR means basic rate and the earnings from this job or pension will be taxed at the basic rate. At the time of filming the basic tax rate is 20% for the current tax year of 19/20 and will continue to be so for the tax year 21/22.
- D0 means higher rate. You need to pay a higher tax rate on income over £50,270 but below £150,000.
- D1 means additional rate and this applies to anyone earning over £150,000. A rate of 45% is charged on income over this amount.
If you see the letter S it means your income or pension is being taxed using the rates in Scotland or C for Wales. There are a lot more different codes so if you don’t see one that’s on your pay slip you can go https://www.gov.uk/tax-codes to find out what it means.
Personal Allowance –
It is a common misconception that you pay tax on everything you earn. At the time of filming this in January 2020, you can earn up to £12,500 without paying any tax (2021/22 increases to £12,570). This is known as your personal allowance. You only start paying tax on anything that you earn over this amount. However, you will also start losing £1 of your personal allowance for every £2 of income earned once you start earning over £100,000.
How to calculate how much you’ll be taxed –
So, starting with your personal allowance, we now know that you can earn up to £12,500 without paying any tax. If we use an example of £30,000 for an annual salary it means you can take off £12,500 which leaves you with £17,500. This is the amount you’ll be taxed on and because it’s under £50,000 you’ll be taxed at the 20% basic tax rate. 20% of £17,500 is £3,500 so this is the right amount of tax you should be paying if you earn an annual salary of £30,000.
If your earnings fall into the higher tax rate bracket, say £55,000 per year, you would pay 20% on your earnings between £12,501 and £50,000. That means £37,500 will be taxed at 20% which is £7,500 to be paid in tax. The additional £5,000 from your £55,000 annual salary will be taxed at 40% which is £2,000 so you would need to pay a total of £9,500 in tax on an annual salary of £55,000.
National Insurance –
As well as income tax, on your payslip you will notice that National Insurance has been deducted. You pay National Insurance contributions to qualify for certain benefits and the State Pension. You’ll receive your National Insurance number when you’re 16 and once you have it, you’ll start paying if you’re earning more than £166 a week or £719 per month (in the tax year 2019/20). Just like tax, you pay different amounts based on how much you are earning. If you make £118 – £165 per week you will pay 0% of your earnings but still qualify for the benefits like the state pension. If you make £166 – £961 a week you will pay 12% of your earnings. And for anything earned over £962 per week, you will be deducted NI at 2%. These contributions mainly qualify you for a state pension, where you need 35 years of paying NI to receive it at the retirement age.
Auto-enrolment for the workplace pension –
The final deduction you may see on your payslip is your workplace pension. This is automatically deducted for people aged 22 or over, earning a minimum of £10,000 from a single job. Although you can opt out, by staying enrolled you are essentially getting free money from both the government and your employer. You pay 5% of your salary into the scheme with your employer paying 3% and the government adding 1% through tax relief. You can then access this money when you are aged 55 or over. Unlike tax and national insurance, you can opt out of this by asking your employer.
Other deductions –
- Court orders – your employer may be asked to take money directly from your pay packet for things like unpaid fines, debt repayments and child maintenance.
- Workplace benefits repayment – some employers offer loans for things like rail season tickets. They’ll usually take the repayments directly from your earnings.
- Charity donation – you can choose to directly donate to a charity from your pay
I hope this has cleared up any confusion about what your payslip contains and how to understand it. If you have any further questions, it is best to ask whoever runs your company’s payroll who will be able to provide more clarification.
Input from Kizzy –
For anyone who has a student loan you may also notice that this get automatically deducted from your pay slip. The repayment threshold will rise for most students from 6 April 2020:
- Plan 1 student loans applies to anyone who took out a loan between 1998 and 2011 (also includes Scottish and Northern Irish loans from 2012). The repayment threshold means you will only start repaying your student loan once you earn at least £19,390 per annum, up from £18,935.
- Plan 2 student loans applies to all those who received a loan from 2012 and applies to all English and Welsh loans only. The repayment threshold will go up to £26,575 per annum, from £25,725.
- For postgraduate loans, the threshold remains the same and you will need to start paying back this loan once you earn at least £21,0000 per annum.
If you need any help with running payroll for your business please do take a look at our payroll service page here.