Tax and National Insurance deductions
As an employee, you pay Income Tax and National Insurance on your wages through the PAYE system. It’s important to check that you have the right tax code and are paying the right amount.
- Do you need to pay Income Tax and National Insurance?
- How much can you earn before tax?
- How PAYE works
- What is a tax code?
- Do you have the right tax code?
- Tips and bonuses
- Benefits in kind
Do you need to pay Income Tax and National Insurance?
You can have a certain amount of income each year, called your Personal Allowance, before you need to pay any Income Tax.
In general, everyone gets the same Personal Allowance of £11,000 for the year 2016-17, but you may get more or less (if your income is over £100,000).
How much can you earn before tax?
As an employee:
- You pay National Insurance contributions if you earn more than £155 a week.
- You pay is 12% of your earnings above that limit and up to £827 a week (for 2016-17).
- The rate drops to 2% of your earnings over £827 a week.
For example, if you earn £1,000 a week, you pay:
- Nothing on the first £155
- 12% (£80.6) on the next £672
- 2% (£3.4) on the next £173
How much Income Tax will I pay: gross and net pay
If you’re an employee, the money you earn (your salary or hourly wage) is called your gross pay.
When deductions from gross pay like tax and National Insurance have been taken off, the amount you receive is called your net pay.
You can see what your gross pay was and how much has been taken off (if anything) on your payslip.
How is tax and National Insurance paid?
If your income is more than your Personal Allowance in a year, you have to pay tax. In general your Personal Allowance is spread evenly across your pay packets for the year and your employer will take out tax before giving you your pay.
They know how much to take out through a system called PAYE (Pay As You Earn). If it turns out at the end of the year that you have paid too much tax, you can get a refund; too little and you will have to pay extra.
Your employer will also make National Insurance deductions from your pay. This is worked out on a weekly or monthly basis, or however frequently you get paid. Unless there has been a mistake, you cannot get back any of the National Insurance you pay, even if your earnings fall later in the year.
How PAYE works
When you start work, you’ll either need to hand in a P45 formfrom your last job, or complete HMRC’s new starter checklist, which you get from your employer.
These forms both tell HM Revenue & Customs (HMRC) that you’ve started work and will be used to create a tax code. Your tax code then tells your employer how much tax to take off your pay. The P46 form is no longer used.
PAYE may be used to collect tax not just on your earnings from this job but also on other income you have.
What is a tax code?
The amount of tax you pay depends on how much income you have and how much tax you’ve already paid in the year, as well as your Personal Allowance. Different people have different tax codes, depending on their circumstances.
Every year, HMRC sends out a Coding Notice telling you what your tax code is and how much tax you’ve paid. You can also find your tax code on your payslip. It’s usually made up of a few numbers and a letter.
How is my tax code worked out?
Your tax code is normally the amount you can earn without paying tax, divided by 10, with a letter added.
Tax code: 1100L
1100 becomes £11,000 earned before tax.
My tax code has no number, or starts with D followed by a number
This is usually because you have more than one source of income. Your Personal Allowance is used up on your main income source, and you pay tax on everything you earn from your second income source.
For example, you might work a main job during the day and do shifts in a pub or work in a factory in the evenings. If you earn more than £11,000 a year in your main job, your second job will be taxed at the basic rate. This can also apply to pensions or money paid out by investments (dividends).
My tax code starts with K
This means you have tax from the past that you still need to pay, or you get money or benefits that can’t be taxed before you receive it, like a State Pension or company car. From this, your employer can work out how much should be paid towards what you owe.
The amount you pay will never be more than half the amount you’ve earned or received that pay period (whether that’s monthly, weekly or another period).
Do you have the right tax code?
Sometimes your tax code isn’t right for your circumstances.
For example, if you started work recently and your correct tax code hasn’t been worked out before your first payday, you might be on an ‘emergency tax code’. This means you’ll be given a Personal Allowance that may not be the right one for you.
How do I check my tax code?
To make sure you’re on the right tax code, check your code matches the Personal Allowance you should be getting.
What do I do if I think my tax code is wrong?
If you think your tax code is wrong, or if you’re in any doubt, contact HMRC. It’s important that you give HMRC all the information they ask for so that you don’t end up on the wrong tax code and pay too much or too little tax.
If you think you’ve paid too much tax
It’s worth checking how much tax you’ve paid on your wages. If you think you’ve overpaid tax, you can check if you’re due a refund on the GOV.UK website or use the HMRC online tax checker.
Depending on your circumstances, you may be able to ask for a refund using a form, or you may need to contact HMRC directly.
If you think you haven’t paid enough tax
If you think you’ve underpaid tax, then you may have to complete a tax return.
In such a case, normal self-assessment time limits apply. To pay an amount up to £3,000 through an adjustment to your tax code for the following year, you should file a return by 31 December following the end of tax year.
Otherwise, tax still due for the last tax year must be paid by 31 January following the end of the tax year in which the income arose.
If you think you haven’t paid enough tax, contact HMRC. You may be asked to complete a tax return. Be aware that if you don’t do this, you will normally have to pay penalties and interest once the underpayment does come to light.
Tips and bonuses
If you get money through your job that’s not part of your usual wages, like an annual bonus or tips from customers, you’ll have to pay tax on it, and usually National Insurance too.
- Your annual bonus, if you get one, is treated as if it’s part of your normal wages. You’ll pay tax and National Insurance on it through PAYE, in the usual way.
- If you get cash tips direct from customers or through a ‘tronc’ system (where tips are pooled and shared between staff members of the pool), you also need to pay tax on them, but not National Insurance, provided the amount you get in tips does not involve your employer. It’s your responsibility to tell HMRC about these tips. They will then give you a new tax code that estimates how much you get in tips each pay period, and taxes you on that amount. Find out more about troncs from HMRC (PDF).
- If a customer gives you a tip via their bank card when paying for a meal or service, and your employer decides whether to share it with you, they are responsible for sorting out the tax and National Insurance. If the employer passes such payments to a tronc, then the rules above apply and no National Insurance is due.
- A service charge is not the same thing as a tip, because the customer doesn’t choose to pay it. A tip is a payment that’s given freely.
Benefits in kind
Sometimes your employer will offer benefits like a company car or health insurance as part of your remuneration package. You may need to pay tax on the value of these benefits.
- Some benefits are always tax-free, such as employer contributions into a pension scheme for you, or childcare vouchers up to a limit.
- Some benefits are always taxable. For example, goods that your employer lets you have for free or below cost price.
- For some benefits it depends. For example, a company car or medical insurance, are taxable only if you earn more than £8,500 per year, including the value of the benefits.
- Season-ticket loans are taxable if the value of all employer loans you get is more than £10,000 for the year.