What is the number you care about the most when you receive a payslip? That would be the net pay for most people. But your payslip is more than just the net pay!
In this article, we will guide you through what are included in the payslips you receive, what are the deductions, tax codes, etc., in order raise awareness so you can look after your own finances better.
Deductions on a Payslip
There are two parts of a payslip; income and deductions. The income part of the payslip is very straightforward, some people might notice they may have some other taxable income such as commission, bonuses, etc. However, there are different types of deductions that you need to be aware of. Income tax and national insurance are the two main types of deductions, but at times you may come across a third which is pension.
Income Tax vs National Insurance
Income tax can also be called PAYE and the amount deducted is based on how much you earn. On the other hand, national insurance goes to the state benefit and has its own threshold. For example, if a person earns more than £8,164 for the current year, then they will have to pay national insurance. The starting rate is 12% up until £45,000 but anything above is 2%. That is what makes income tax and national insurance so different. The more you earn the more income tax is deducted but at the same time the more you earn the less national insurance is being deducted.
With auto-enrolment taking place, more people will start to see pension being deducted from their payslip. Although it is classed as a deduction, it is of benefit to you as the amount taken will go into your own pot. The amount is put aside for your retirement. The more you put into your pension the less income tax you have to pay, which is something you might want to consider for the long-run.
Tax codes can be very complicated to understand but they are very important. Every year, the normal tax code can be slightly different because each year the personal allowance is different.
· 1150L – A lot of people will have this tax code which is the tax code for the current year 16/17. This means that the personal allowance is £11,500.
· Emergency Tax Code – There may be different tax codes based on previous overpaid or underpaid tax and if you have a second job. This type of tax code will appear if your employer was not sure what tax code you had from your previous job. Currently it is 1150L W1/M1.
Where appropriate, it is important to consider talking to an accountant so that you can make sure you have the correct tax code or paying the right amount of national insurance.
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