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Tax and National Insurance

income tax is a percentage of your earnings that must be given to the government to pay for many of the goods and services that the country provides for the population (roads, education etc.).

What must I pay tax on?

All earnings are taxed. Including basic pay, overtime, part-time pay, bonuses and tips. So is unemployment pay. There is no tax on training grants.

How much tax must I pay?

Every individual has a personal allowance of 5,435 on which they are not taxed. Anything above this figure you will have to pay income tax on. For example, Joe (from our example in the getting paid section) only pays tax on the amount of his 10,000 a year above 5435 which is 4565.

The amount of money you earn above the personal allowance is known as your taxable income. This is taxed at the following rates, Basic rate of 20% from 0 to 36,000 (total income of 5,435 to 41,435 including personal allowance) Higher rate of 40% above 36,000 (total income above 41,435).

This means Joe will pay the basic rate of 20% on his taxable income of 4,565.

How do I pay tax?

Unless you are self-employed, tax will be deducted automatically from your earnings by your employer and paid directly to the Inland Revenue. This system for deducting tax is known as Pay As You Earn (usually called PAYE for short). Self-employed people need to fill in their own tax forms and pay the Inland Revenue at the end of each tax year.

For most employees, PAYE makes sure that the right amount of tax is deducted over the tax year as a whole. This is done by the use of a tax 'code number', which the tax office tells your employer to use when deducting your tax each pay-day. Your tax office will send you a form P1, telling you what your code number is. They will also tell you if your code changes.

When you start work, your employer will ask you to fill in a form P46. This gives the employer the information needed to give you a code number.

How do National Insurance contributions work?

Like income tax, national insurance contributions depend on the amount of your earnings and are worked out by your employer. Money collected in national insurance is used to help pay for government social services, such as health and state retirement pensions. What you pay is recorded by the Inland Revenue, and used to calculate the amount of pension you receive when you eventually retire.

You will see your employer's national insurance contributions also mentioned on your payslip. These are payable by the employer on your behalf and are not deducted from your pay.

More about National Insurance contributions on www.direct.gov.uk.

How do I know how much tax I've paid and how much I have earned?

Form P60
Shortly after the end of each tax year (5th April), your employer must give you a statement known as a 'P60'. The P60 form says how much you have earned during the previous tax year, and is proof of the tax you've paid. You may well need to refer to your P60 at a later date.

What happens when I change my job?

Form P45
If you leave your job, the employer you're leaving must give you a form called a 'P45'. It shows your PAYE code number, your total earnings so far for the tax year and how much tax you have paid during that tax year.

Your next employer will need the information on the P45, so you can be given the correct code number and have the right amount of tax deducted.

Your employer is required to give you your P45 when you leave.

The P45 comes in four parts:

  • The employer you are leaving sends Part 1 to
    the tax office and gives you the rest;
  • You give Parts 2 and 3 to your new employer;
  • You keep Part 4 for your own records.

This page was updated on 5 August, 2008

 

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