- To understand the importance of tax and National Insurance contributions when you start work

Transcription

1 Your payslip (Teacher notes) Key concepts - To understand the importance of tax and National Insurance contributions when you start work - To be able to understand your payslip and how the deductions are calculated Skills - Understanding the effect of deductions on the individual s budget - Finding out where to get more information Helpful tips - Use the full screen when using the Powerpoint presentation - Hand-outs - Copy one payslip per full page and the tax rates on another full page Slide 1 Your payslip Today, we will be looking at tax and how it will affect you in the future when you are earning money by working. Slide 2 Your Payslip You can earn money in various ways for example, being a landlord and charging rent, or running your own business and being self-employed; but most people will be an employee and work for an organisation. For example, the teachers at this school are employees. When you are an employee, you are paid at regular intervals (usually weekly or monthly) and the details of your pay are contained on your payslip. This lesson looks at payslips, to help you understand your money when you start work. Slide 3 Money for living We all like to have money to be able to afford things. These might be essentials (a place to live and food to eat) or luxuries (holidays, concert tickets, new gadgets). Most people have to work to earn money to live on. Most of us will work for an organisation so will be an employee and will earn a salary (that is your wages or pay).

2 You need to know that the amount of pay you are offered will NOT be the amount you receive. So if your salary is 24,000 a year, you will not receive 2,000 in your bank account at the end of every month. This is because tax and other amounts are taken off and reduce your pay to what you actually receive, that is your take home pay or net pay. Now, let s look in more detail at the deductions from your pay. Slide 4- Deductions What is taken out from your pay? Income tax Tax is a financial charge or deduction from something you get or own. It is not a penalty or fine for doing something wrong. Normally governments collect taxes so that there is a pot of money to spend on things that benefit society as a whole. This might be law enforcement, including the police and courts, infrastructure, like roads and pathways, and administration. The UK Government also uses tax to pay for public services like healthcare and welfare benefits. There are many different taxes such as VAT on goods and services you buy, Council tax, Stamp Duty Land Tax (this is paid when you buy a house); today we will be focusing on income tax. National Insurance contributions These are not strictly a tax. They were originally a form of Government insurance policy so that you could claim some help at certain times in your life: ill-health, disability or retirement. They are paid by workers and employers. The link between individual contributions and benefits has gradually weakened, but the number of years for which you make National Insurance contributions still affects some welfare benefits, including your entitlement to the state pension. Student loan repayments If you go to college or University, you may be charged tuition fees and will need money to live on as well. You can borrow money through the Government s student loan scheme. You only repay student loans when you are earning above a certain amount. You repay your student loans through your wages so your employer will take out the student loan repayments direct from your pay and pass them to the Student Loans Company to reduce your debt. Pension contributions People are living longer, so the Government is worried that people are not saving enough for their retirement. On top of paying National Insurance contributions, workers who are over 21 and earning above a certain amount will automatically be put into their employer s pension scheme and expected to pay into it regularly. Slide 5 What should I look for on my payslip?

3 Let us now look at a payslip. All organisations will have slightly different looking payslips, but every payslip must contain certain information which is shown on the next slide. Slide 6 The top box contains your personal details Your name Your National Insurance number This is a unique number that you receive when you are 16; it stays with you for life and is used to identify what contributions you have paid and what benefits and state pension you are entitled to. Tax code Most people (unless they have income of 100,000 or more) will receive a tax free personal allowance. This means that you can have income up to that amount without paying any tax. The personal allowance for the 2016/17 tax year (the tax year 6 April 2016 to 5 April 2017) is 11,000, so the 1100L tax code for Mr Smith means he gets a yearly personal allowance of 11,000. This means Mr Smith can earn 11,000 without paying any income tax. How you will be paid This is usually direct into your bank account (BACS is an automated payment system). The date of your payslip. Slide 7 This green box explains how your gross pay is calculated - that is the salary you have earned before any deductions are made. So in this case, Mr Smith has worked 100 hours in April and he is paid 10 an hour, so his wages are 1,000. Slide 8 The blue box looks at the deductions we have been discussing (we will look later at how they are calculated). For Mr Smith earning 1,000 a month he will have the following deductions: Tax (income tax is sometimes called PAYE tax ) National Insurance contributions 40.00(note that in this case National Insurance contributions are higher than income tax) Pension Student Loan 0.00 (this is because Mr Smith does not earn enough to start repaying his student loan). Slide 9 The black box shows what you actually take home, which is called your net pay. So even though Mr Smith earns 1,000 he will only take home net pay of Slide 10 This slide looks again at the full payslip and the purple box on the right hand side shows details about what you have earned during the tax year altogether (so from 6 April 2016 to 5 April 2017), and what your total deductions are during the year. This is Mr Smith s first payslip for the tax year, so the total figures are the same as the figures for this month. The orange box shows

4 - What payments your employer (so the organisation that is employing you) has to pay in National Insurance contributions. These are not taken off your pay but are an additional cost of employing staff. - Tax district this refers to the HM Revenue & Customs (HMRC) office (the Government department that is in charge of collecting tax) your employer deals with. - Tax reference this is the Pay As You Earn reference that each employer has. You will need it along with your National Insurance number when contacting HMRC with any questions about your income tax and National Insurance contributions. Slide 11 Work out your monthly take home pay Now it s your turn to work out what the deductions will be on payslips for someone earning 18,000 a year. In a moment, I will be handing out a blank payslip for you to calculate the deductions for income tax, National Insurance contributions, pension contributions and student loan repayments. Slide 12 To calculate the deductions, you will need to know what the thresholds and rates are. This slide will provide the information you need and will be included on the hand-outs to help you with the calculations. Income tax We discussed the personal allowance earlier, as Mr Smith did not have to pay tax on his first 11,000 of income. So the rates are as follows: ,000 no tax is due because of the personal allowance; then if you are earning - 11,001-43,000 the tax rate is 20% - 43, ,000 the tax rate is 40%; then the rate above 150,000 is 45% National Insurance contributions The rates and the thresholds when workers or employees pay National Insurance contributions are different from those for income tax. 0-8,000 no National Insurance contributions are due. 8,001-43,000 the rate for National Insurance contributions is 12%, and then the rate on income above 43,000 is 2%. Student Loan repayments You only need to start repaying your student loans when you are earning more than 21,000 per year. When you earn more than this you repay your student loan at a rate of 9% on income over 21,000 Pension contributions

5 If you earn over 10,000 and are aged over 21, you will be automatically enrolled into your employer s pension scheme. You and your employer together have to contribute a minimum percentage of your wages to the pension. The examples given assume you pay in 4% of your wages above the lower earnings limit. In reality, this limit is 5,824 a year, but for simplicity we have used 6,000. Depending on how your employer runs their pension scheme, the contributions might be 5% reduced by tax relief of say 20%; but we ignore this in the examples to make it easier! So pension contributions in these examples will be: 0-6,000 - no pension contributions 6,001-43,000 4% STOP THE PRESENTATION TO ALLOW STUDENTS TIME TO DO THE 18,000 PAYSLIP EXAMPLE IN THE HANDOUT DO NOT CLICK ON THIS SLIDE UNTIL STUDENTS HAVE COMPLETED THE EXAMPLE AS IT CONTAINS THE ANSWER I want you to calculate the deductions for Mr Smith who earns 18,000 a year and is paid monthly and work out what his take-home pay will be. REMEMBER the tax rates are on an annual basis and you are calculating a monthly payslip. Slide 13- Payslip example answer - 18,000 18,000 payslip The payslip extract shows the deductions the students should have calculated: So Mr Smith is earning 1,500 per month, and that is 18,000 per year. His income tax deduction will be as Mr Smith earns above his personal allowance of 11,000. (You can see from his tax code 1100L that Mr Smith is entitled to his full personal allowance). So the tax deduction will be ( 18,000-11,000) x 20% = 1,400, so for each month that will be (in the real world, the last 6 pence is rounded down). National Insurance contributions Mr Smith earns more than the National Insurance threshold of 8,000, so he will have a deduction of 10,000 ( 18,000-8,000) x 12% = 1,200, so for each month that will be 100. Pension Mr Smith earns more than the pension threshold of 10,000, so he will be automatically enrolled into his employer s pension and his deduction will be calculated as: 12,000 ( 18,000-6,000) x 4% = 480 per year, so each month. Student loans Mr Smith is not earning enough to repay his student loan.

6 This means that Mr Smith will have deductions of and so will take home net pay of 1, Slide 14 Payslip example - 18,000 This shows the previous slide in the context of a full payslip including the employer s National Insurance contributions. Slide 15 Are you on the ball? (This is an optional exercise for students who are ahead with the example or for the teacher to use as a further example during the lesson). Try this example using the weekly payslip on the hand-out. There will be no student loan repayments or pension contributions. Slide 16 Wayne s weekly payslip If you look in the top box you will see that Wayne s tax code is different to Mr Smith. This is because Wayne will be earning over 100,000 and therefore will not be eligible for a personal tax allowance. Wayne s tax code is 0T showing he will not be entitled to any personal allowance. However, for simplicity for this example, we will use the tax rates as shown in slide 12. Slide 17 Wayne s weekly payslip Wayne earns 300,000 per week. His annual taxable income will be: 300,000 x 52 weeks = 15,600,000 per annum Slide 18 Wayne s weekly payslip Tax for the year will be: 0-11,000 0% so 0 11,000-43,000 (so 32,000 x 20%) = 6,400 43, ,000 (107,000 x 40%) = 42,800 15,450,000 x 45% = 6,952,500 In total for the year that is 7,001,700 so per week would be 134,648 Wayne s National Insurance contributions would be: 0-8,000 at 0% 8,000-43,000 at 12% is 35,000 x 12% = 4,200 43,001-15,600,000 at 2% is 15,557,000 x 2% = 311,140

7 So Wayne s annual National Insurance contributions would be 315,340 which is 6,064.20per week. As this is the last payslip in the tax year ( ) for Wayne, you can see in the right hand side box the cumulative amounts that Wayne has paid for income tax and National Insurance during the tax year. (Almost half of Wayne s earnings have been deducted as National Insurance contributions and tax). Slide 19- Wayne s weekly payslip Also look at how much Wayne s employer has had to pay in National Insurance contributions over 2 million in the year; this is an additional cost for his employer on top of his salary costs. We have not asked the students to calculate Wayne s pension or student loan because the high amount of his salary would mean that he would have already repaid his student loan (if he had taken one out) and his pension contributions would be capped. Slide 20 Wayne s weekly payslip This is the full payslip from which slides show extracts. Slide 21 Key points What you receive will be different to your agreed salary. Your pay will be reduced by Income tax National Insurance contributions Student loan repayments Pension contributions Slide 22 Key points (continued) When you start work, make sure you: Understand your payslip Check that your deductions are correct (sometimes mistakes are made with your money!). If they are incorrect, ask your employer or HMRC. Know what you will receive when your pay increases. Further information on tax

8 Tax Guide for Students website ( is a free, independent website that provides information on the following: Tax essentials Working Volunteering and Training Tax credits and benefits Tax refunds Types of students Going abroad Other income Student loans The GOV.UK website ( has information on tax and contact information if you have questions for HM Revenue & Customs regarding your tax. The Chartered Institute of Payroll Professionals has an understanding your payslip tool: There are also additional examples which can be used as a project exercise: 36,000 96,000 Payslip example 36,000 This time Mr Smith is earning 36,000 per year, and so is earning 3,000 a month. What are the deductions? Income tax ,000 at 0% so 0-11,001-36,000 at 20% so 25,000 x 20% = 5,000 per year so each month. National Insurance contributions - 0-8,000 at 0% so 0-8,001-36,000 at 12% so 28,000 x 12% = 3,360 per year so 280 each month. Pension 0-6,000 at 0% so 0 6,001-36,000 at 4% so 30,000 x 4% = 1,200 per year so each month. Student Loan

9 Mr Smith earns above the student loan threshold so will have student loan repayments deducted. 0-21,000 at 0% so 0 21,000-36,000 at 9% so 15,000 x 9% = 1,350 per year so each month. This means Mr Smith will have total deductions of So from earning 3,000 that month, over 30% of his salary is deducted to make his take home pay just 2, ,000 payslip So now Mr Smith is earning 96,000 per year which is 8,000 per month. Let s look at the deductions to his payslip. Income tax ,000 at 0% so ,001-43,000 at 20% so 32,000 x 20% = 6,400-43,001-96,000 at 40% so 53,000 x 40% = 21,200 This gives a total tax deduction for the year of 27,600 and a monthly deduction of 2, National Insurance -0-8,000 at 0% so ,001-43,000 at 12% so 35,000 x 12% = 4,200-43,001-96,000 at 2% so 53,000 x 2% = 1,060 This gives a total tax deduction for the year of 5,260 and a monthly deduction of Pension 0-6,000 at 0% so 0 6,001-43,000 at 4% so 37,000 x 4% = 1,480 The pension is capped at 43,000 so the monthly deduction will be 1,480 /12 = Student loan repayments 0-21,000 at 0% so 0 21,000-96,000 at 9% so 75,000 x 9% = 6,750 per year, this is each month. This means Mr Smith will have total deductions of 3, So from earning 8,000 that month, over 42% of his salary is deducted to make his take home pay only 4,

10