In a letter written in 1789, Benjamin Franklin said ‘in this world, nothing is certain but death and taxes’.
While there is an element of truth in this, actually, all matters relating to tax, in both permanent and temporary contracts are relatively straightforward and you don’t need a PhD in Applied Microeconomics to understand it. We (and your employers) do it for you. As you will imagine, the legislation governing tax matters in the UK is phenomenally complex and outside the scope of understanding for most of us, but here are the headline facts.
If you need more information or clarification, your Asset Resourcing consultant will help you.
Employee tax and National Insurance
If you’re employed you pay tax on your salary through a system called PAYE (Pay As You Earn). Your employer uses this system to deduct Income Tax and National Insurance (NI) contributions from your salary before they pay you.
The amount you earn before tax and NI are deducted is your ‘gross salary’. The amount you get after tax and National Insurance has been deducted is your ‘net salary’. When you get a pay slip, you’ll see –
- the gross salary you’ve earned including any bonuses
- how much Income Tax has been deducted
- any NI contributions that have been deducted
- any student loan repayments, if relevant
- your take home pay, or the net salary you’ve actually received
As well as being taxed on your pay, you’re also taxed on benefits your employer provides, such as a company car, fuel, a low interest loan or medical insurance and you may also have to pay tax on tips you receive as part of your job.
You pay NI contributions to build up your entitlement to a State Pension and other social security benefits. How much you pay depends on how much you earn. If you earn over a certain amount, your employer deducts Class 1 NI contributions from your wages through the PAYE system.
You pay a lower rate of NI contributions if you’re a member of your employer’s ‘contracted-out’ pension scheme, or you’re a married woman – or widow – who holds a valid ‘election certificate’.
Your employer also pays employer National Insurance contributions based on your earnings and on any benefits you get with your job for example a company car.
HM Revenue & Customs (HMRC) keeps track of your contributions through your National Insurance number. This is like an account number and is unique to you.
How much can you earn before you pay tax and NI?
Income Tax – Everyone can earn a certain amount each year without paying any Income Tax. This is called your Personal Allowance. In 2011-12 the Personal Allowance is £7,475.
National Insurance – You can earn up to £139 a week (2011-12) before you pay any National Insurance contributions. This is known as the ‘primary threshold’. However, as long as you earn more than £102 a week (2011-12) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the ‘lower earnings limit’.
Further information is available here
Tax & NI on tips and bonuses – www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/WorkingAndPayingTax/DG_10026509
Tax & NI on company benefits – www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/WorkingAndPayingTax/DG_10021716
Tax codes –
NI contribution rates and thresholds – http://www.hmrc.gov.uk/rates/nic.htm
Income tax rates and allowances – http://www.hmrc.gov.uk/rates/it.htmBack to Candidate Clinic