X

Tagged national insurance

Browsing all posts tagged with national insurance

How much Income Tax and National Insurance you should pay

As an employee, you pay Income Tax and National Insurance on your wages through the PAYE system. It’s important to check 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 you need to pay Income Tax?
  • How much can you earn before you need to pay National Insurance?
  • What’s the difference between gross and net pay?
  • How is tax and National Insurance paid?
  • How PAYE works
  • What is a tax code?
  • What is an emergency tax code?
  • Tips and bonuses
  • Benefits in kind

Do you need to pay Income Tax and National Insurance?

You can earn a certain amount of income each year, called your Personal Allowance, before you need to pay any Income Tax.?

Got a question?

Our advisers will point you in the right direction.

Start a webchat online or call us on 0800 138 1677.

In general, not everyone may get the same Personal Allowance of £12,500 for the tax year 2019/20. A tax year runs from the 6th April to the 5th April.

The personal allowance is a fixed amount set against your gross income (your income before tax or any other deductions are taken) that allows you to receive that much income free of tax in a tax year.?

Received a loan from your employer?

This could be seen as tax avoidance and subject to a loan charge. HMRC have asked people who have been part of disguised remuneration schemes to come forward and provide information.

Further support is available on a dedicated HMRC helpline on 0300 0534 226.

However, you might get a smaller personal allowance if your income is over £100,000 or if you owe tax from a previous tax year. You might also get a larger Personal Allowance if you have overpaid tax from a previous tax year.

The Personal Allowance will also be set at £12,500 for 2020/21 and then indexed with the Consumer Price Index (CPI) from then onwards.Find out more about How Income Tax, National Insurance and the Personal Allowance work

How much can you earn before you need to pay Income Tax?

In the UK, the tax system is based on marginal tax rates. That means it’s worked out as a percentage of income you earn inside certain thresholds – you don’t pay the same amount of tax on everything you earn.

As an employee:

  • you pay 0% on earnings up to £12,500* for 2019-20
  • then you pay 20% on anything you earn between £12,501 and £50,000
  • you’ll pay 40% Income Tax on earnings between £50,001 to £150,000
  • if you earn £150,001 and over you pay 45% tax.

*This assumes you have the standard Personal Allowance of £12,500 which is the amount you can earn before paying tax. Your Personal Allowance might be higher, for example if you’ve claimed certain allowances or if you’ve paid too much tax. It could also be lower for example, if you earn over £100,000, the standard Personal Allowance of £12,500 is reduced by £1 for every £2 of income.

For example, if you earn £52,000 a year, you pay:

  • nothing on the first £12,500
  • 20% (£7,500.00) on the next £37,500
  • 40% (£800) on the next £2,000.

You can use GOV.uk’s tool to estimate how much Income Tax and National Insurance you should pay for the current tax year. It can help work out your take-home pay if you don’t have any other deductions, for example pension contributions or student loans.

If you’re self-employed, the self-employed ready reckoner tool can help you budget for your tax bill.

From 6 April 2019 income tax rates will be set by the Welsh Government. These are currently the same as for England and Northern Ireland for the 2019/20 tax year.If you live in Scotland, Income Tax rates are different. Find out more on our Scotland Income Tax and National Insurance page.

How much can you earn before you need to pay National Insurance?

National insurance contributions (NICs) are taken from your earned income and essentially help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

If you’re an employee, you’ll need to pay Class 1 NICs on your earnings. In addition, your employer will be required to make a secondary contribution of 13.8% of earnings above £166 a week. There is no upper limit on employer’s National Insurance (NI) payments.

As an employee:

  • you pay National Insurance contributions if you earn more than £166 a week
  • you pay 12% of your earnings above this limit and up to £962 a week (for 2019-20)
  • the rate drops to 2% of your earnings over £962 a week.

For example, if you earn £1,000 a week, you pay:

  • nothing on the first £166
  • 12% (£95.52) on the next £796
  • 2% (£0.76) on the next £38.

If you live in Scotland, Income Tax rates are different. Find out more on our Scotland Income Tax and National Insurance page.

What’s the difference between gross and net pay?

Gross pay is the income you receive before any taxes and deductions have been taken out. Your annual gross pay is what’s often referred to as your annual salary.

Net pay is what’s left over after deductions like Income tax and National Insurance have been taken off. It’s what’s often referred to as your take home 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 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 form from your last job, or complete HMRC’s new starter checklist, which you get from your employer.

These forms both tell HM Revenue & Customs (HMRC) 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 might 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
  • how much tax you’ve already paid in the year
  • 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.

For example:

Tax code: 1250L

1250 becomes £12,500 earned before tax.

My tax code starts with BR

You are not getting your tax-free basic personal allowance which means all your income is being taxed at the basic rate of 20%.

This can occur if your employer doesn’t have all the information it needs to work out your tax code.

It doesn’t always mean you’re paying the wrong amount of tax. For example, you may have two jobs and HRMC has allocated your personal allowance against one of these.

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 £12,500 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 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 during the pay period (whether that’s monthly, weekly or another period).

What is an emergency tax code?

Sometimes your tax code isn’t right for your circumstances and you might be given an emergency code.

An emergency tax code assumes that you’re only entitled to the basic personal allowance. It’ll mean you’ll pay tax on all your income above the basic personal allowance (£12,500 for 2019-20).

It won’t take into account any allowances or reductions and reliefs you might be entitled to.

This could mean you pay more tax than you should be for a short period of time.

For 2019-20, the emergency tax codes are:

  • 1250L W1
  • 1250L M1
  • 1250L X.

You may be put on an emergency tax code if you’ve started a new job, started working for an employer after being self-employed or are getting company benefits or the State Pension.

If your tax code is one of these, HMRC will automatically update it, but it might mean that for one or two months your pay won’t be the same, so be careful with your budgeting.

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.You can check your Income Tax for the current year by using the GOV.UK service.

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 you give HMRC all the information they ask for so you don’t end up on the wrong tax code and pay too much or too little tax.Contact HMRC to sort out a tax problem.

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 might be able to ask for a refund using a form, or you might need to contact HMRC directly.Contact HMRC to ask for a tax rebate.

If you think you haven’t paid enough tax

If you think you’ve underpaid tax, then you might have to complete a tax return.

If this is the 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 might be asked to complete a tax return. Be aware if you don’t do this, you will normally have to pay penalties and interest once the underpayment does come to light.Contact HMRC to sort out a tax underpayment.

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 estimating how much you get in tips each pay period, and taxes you on that amount. Find out more about troncs from HMRC (PDF)opens in new window.
  • 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.

These are known as ‘benefits in kind’.

You might 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, season-ticket loans are taxable if the value of all employer loans you get is more than £10,000 for the year.

How does tax work in UK

How Income Tax, National Insurance and the Personal Allowance works

Unsure about Income Tax and National Insurance? Don’t know what the National Insurance threshold is? Unsure how the Personal Allowance applies to you? We explain how the tax system works and what to do if you think you’re overpaying.

  • Should I pay any Income Tax?
  • The Personal Allowance if you earn over £100,000
  • What is Income Tax used for?
  • How much Income Tax will I pay?
  • National Insurance
  • What do you pay National Insurance on?
  • Voluntary ‘Class 3’ National Insurance rates
  • Voluntary ‘Class 2’ National Insurance rates

Should I pay any Income Tax?

Income Tax is charged on most types of income, such as wages and salary from jobs, your profits if you run a business, pensions, rents you receive if you’re a landlord, and interest and dividends from savings and investments.?

Got a question?

Our advisers will point you in the right direction.

Start a webchat online or call us on 07868 663538.

You don’t usually pay Income Tax on all of your taxable income. This is because most people qualify for one or more allowances. An allowance is an amount of otherwise taxable income that you can have tax-free each tax year.


Reduced by £1 for every £2 above income threshold until it reaches £0.

20% of this allowance is given as a reduction in your tax bill (unlike the Personal Allowance and Age Allowance which are deducted from your taxable income before tax is worked out).

£1,000 for basic-rate taxpayers; £500 for higher-rate taxpayers; £0 for additional-rate taxpayers.

Most allowances are increased each year and increases apply from the start of the tax year, 6 April.

Jump down to ‘How much Income Tax will I pay?’ to find out what you’re liable for.

What is a Personal Allowance?

Everyone, including students, has something called a Personal Allowance – the amount of money you’re allowed to earn each tax year before you pay Income Tax. Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance, or smaller depending on your income or if you owe tax from a previous tax year.

The tax year runs from 6 April to 5 April, and for the 2019-20 tax year the standard Personal Allowance is £12,500. The Personal Allowance will also be set at £12,500 for 2020/21 tax year and then indexed with the Consumer Price Index (CPI) from then onwards.

If you earn less than this, you normally shouldn’t have to pay any Income Tax.

The amount of the Personal Allowance you receive is set by the government and can change from one tax year to the next.Check the most up-to-date Personal Allowance figures on GOV.UK.

The Personal Allowance if you earn over £100,000

For people earning over £100,000, the figure of £12,500 will be reduced by £1 for every £2 earnt. When someone earns £125,000 Income Tax is paid on everything earnt and there’s no tax-free allowance.

What is Income Tax used for?

Your Personal Allowance is taken off your earnings before you start paying Income Tax.

Income Tax is collected by HMRC on behalf of the government. It’s used to help provide funding for public services such as the NHS, education and the welfare system, as well as investment in public projects, such as roads, rail and housing.

How much Income Tax will I pay?

From April 2019, the standard Personal Allowance will increase to £12,500, with the higher rate tax threshold increasing to £50,000.

Income Tax is made up of different bands. This means that as your income increases so too does the amount of Income Tax you pay.

It’s an attempt to make paying Income Tax as fair as possible so that those who earn the most contribute more.

The table below shows the rates of Income Tax depending on how much you earn.

If you live in Wales, income tax rates are now set by the Welsh Government. These are currently the same as for England and Northern Ireland in the 2019/20 tax year. If you live in Scotland, the rates are different.

Calculate your income tax and national insurance contributions.

If you think you might have had Income Tax wrongly taken from your earnings, fill in the form from Her Majesty’s Revenue and Customs (HMRC) to have it paid back to you.Get the R38 form to reclaim tax on GOV.UK, or contact HMRC.

National Insurance

National Insurance contributions are a tax on earnings paid by employees and employers and help to build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance.

Unlike Income Tax, National Insurance is not an annual tax. It applies to your pay each pay period (which might be monthly, weekly or some other period depending on your employer’s arrangements). This means if you earn extra in one month, you’ll pay extra National Insurance, but you won’t be able to claim the extra back even if your pay is lower during the other months of the tax year.

You begin paying National Insurance once you earn more than £166 a week (this is the figure for the 2019-20 tax year).

The National Insurance rate you pay depends on how much you earn:

  • 12% of your weekly earnings between £166 and £962
  • 2% of your weekly earnings above £962.

Your National Insurance contributions will be taken off along with Income Tax before your employer pays your wages.

Until April 1977, some older married women and widows who pay National Insurance contributions at the Married Women’s Reduced Rate could choose to pay a reduced rate of national insurance. You might still be paying the reduced rate if you opted for this before the scheme ended. The reduced rate is 5.85% of weekly earnings between £166 and £962 instead of the standard rate of National Insurance of 12% on earnings. As a result, your State Pension could be reduced and your ability to claim some contribution-based benefits could be negatively impacted.

Employee’s National Insurance contributions stop once you reach State Pension age.Find out more about your National Insurance contributions on GOV.UKopens in new window.

What do you pay National Insurance on?

Both you and your employer must pay National Insurance contributions on your earnings – including holiday pay, sick pay and maternity pay – and, in most cases, any reward you get that can be easily converted to cash. But there are exceptions – for example, if part of your pay is shares in your employer’s company using a tax-approved share scheme.

Part of your pay may be in the form of benefits in kind. As an employee, there is no National Insurance on benefits in kind. However, with some exceptions, employers do have to pay National Insurance on the value of any benefits in kind that they provide you with.

What do National Insurance payments pay for?

Your National Insurance payments go towards state benefits and services, including:

  • the NHS
  • the State Pension
  • unemployment benefits
  • sickness and disability allowances.

Voluntary ‘Class 3’ National Insurance rates

Class 3 voluntary National Insurance contributions are designed to fill in any gaps in your National Insurance record to get a higher State Pension.

To receive the full new State Pension, which is payable to people who have reached their State Pension age on or after 6 April 2016, you’ll need to have 35 qualifying years of National Insurance contributions.

Anyone with less than this will receive a reduced State Pension. To receive the new State Pension you need to have a minimum of 10 qualifying years.

If you don’t have 35 qualifying years, you may want to consider paying Class 3 voluntary contributions to boost your pension entitlement.

In 2019-20, Class 3 contributions are payable at a weekly rate of £15. This is the maximum you can pay each week.

You may not always be able to pay Class 3 contributions (or Class 2) for a tax-year. That’s why it’s important to find out whether you can make payments towards any gaps, how much you will need to pay, and what benefit (if any) you would get by making a voluntary payment before deciding whether to pay any voluntary National Insurance Contributions (NICs).For further information on paying voluntary Class 3 National Insurance contributions and to check your national insurance record visit the GOV.uk website.

Voluntary ‘Class 2’ National Insurance rates

If you’re self-employed or have been working abroad, you may be able to pay voluntary Class 2 contributions instead.

Class 2 NICs are currently flat-rate weekly contributions of £3.00 per week in 2019-20. You’ll need to pay them for every week or partial week of self-employment in a tax year if your profits for the entire tax year are £8,632 (the Small Profits Threshold) or more in 2019-20.

Payment of Class 2 contributions is voluntary for self-employed people with profits below the Small Profits Threshold. Paying Class 2 NICs even if your profits are lower can still help you build contributory entitlements to benefits.

This can be a specialist area and it’s best to take advice based on your individual personal circumstances.

CLOUD ACCOUNTING LLP

#NumbersinBlackandWhite

ONLINE CHARTERED ACCOUNTANTS

BELFAST ADDRESS
Catalyst Inc,
Titanic Quarter
Belfast
BT3 9DT
+44 2895 219365


LONDON ADDRESS
New Broad Street House
35 New Broad Street
London EC2M 1NH
+44 207 971 1002

Name: Cloud Accounting LLP
Email address: richard@cloudaccountingni.com
Phone: +447868663538