How do you know if you're paying the right amount of tax? Payslips can be complicated and it can be difficult to understand exactly where your money is going and why. Say goodbye to confusion as we breakdown all the important elements of your payslip, to help you ensure you're being correctly rewarded for your hard work.
1. Tax code
The first is a number which represents how much you can earn before being taxed, this is called your Personal Allowance.
For 2020/21, your Personal Allowance is typically £12,500. HMRC take your Personal Allowance and deduct any income you have earned but not paid tax on, which can include employment benefits and other incomes. They remove a zero from this figure, and this becomes the numerical part of your tax code.
If you have no additional taxable benefits or income for 2020/21, your tax code will start '1250'. This number is usually followed by a letter, which varies according to your circumstances:
If you're living in England, Wales and Northern Ireland - here's what they all mean;
L means you are entitled to the standard tax-free personal allowance
M means you've received 10% of your partner's personal allowance
N means you've transferred 10% of your allowance to your partner
T means other calculations are being used to determine your personal allowance, if you earn more than £100k per year, for example
0T or S0T means you have used up your personal allowance, or your new employer doesn't have the details needed to provide a tax code
BR means all your income is taxed at the basic rate
D0 or D1 means your income is taxed at a different rate
NT means you're not paying any tax on this income
Tax codes relating to employees in Scotland; S, SBR, SDO, SD1 or SD2
If you think you are on the wrong tax code you can request HMRC to send your employer a new tax code by calling the Income Tax Helpline on 0300 200 3300.
2. National Insurance
Anyone over 16 earning more than £183 per week (in 2020/21) is required to make National Insurance contributions. You pay 12% of your earnings above the £183 per week limit, up to £962 per week, when it drops to 2%.
For example, if you earned £1,000 per week you will pay:
Nothing on the first £183
12% on the next £779 (£93.48)
2% on the remaining £38 (76p)
Unless you opt-out you will be auto-enrolled into a workplace pension scheme if you are over 22 and earn more than £10,000. The current minimum contribution is 5%, and your employer has to match this contribution with at least 3%, taking your total pension contribution 8% of your pay.
4. Student loan repayment
There are two types of student loan repayment plans, imaginatively named 'Plan 1' and 'Plan 2'. The main difference between the two is they have different 'thresholds' based on your weekly or monthly income. When you earn more than the threshold, you pay 9% of whatever you earn over it.
If you are/were a student in Scotland or Northern Ireland, or you started your undergraduate studies before September 2012 in England or Wales then you'll be on Plan 1.
The Plan 1 threshold is currently (tax year 2020/21) £19,390 annually (before tax/deductions).
English and Welsh students who started undergraduate studies after 1 September 2012 are on Plan 2.
The payment threshold for Plan 2 is currently (tax year 2020/21) £26,575 annually - £2,215 per month. If you were paid £2,400 this month, your income was £185 over threshold. You will pay 9% of £185 = £16.65.
If you have typical working hours, you may receive overtime pay for work outside these hours. Your employment contract will state what your normal working hours are, anything above this is overtime.
Ensure you are being paid the proper hourly rate for your contracted hours and the appropriate rate for any overtime.
Employers don't have to pay extra for overtime, but your average hourly wage for the total hours you work should not fall below the National Minimum Wage (£8.72 for over 24s from 6 April 2020 onwards).