PAYE – Pay as You Earn

Your employer will deduct PAYE (pay as you earn) or income tax from your salary. Everyone has an annual personal tax allowance of £12,570 for the current tax year. This means you can earn up to £12,570 and not pay any tax. This is also referred to as your tax code and is abbreviated as 1257L on your payslip. The personal allowance is cumulative over the year, so in the first month of the tax year, you can earn £1,047.50 tax-free. Earnings above this amount will be taxed at 20% (assuming you fall within the basic tax band). In the second month of the tax year, you can again earn £1,047.50 tax-free or £2,095 cumulatively for the year tax-free.

For example, if you first start working in the third month of the tax year, which will be June, your cumulative tax allowance will be £3,142.50 (3 x £1,047.50). If your salary is £3,000 per month, you won’t pay any tax for June as you will have earned less than your cumulative tax allowance to June. In July you will pay tax on £1,810 at 20% (£3,000 less your monthly tax allowance of £1,047.50 less the £142.50 of your unused tax allowance remaining from June = £1,810). The tax for July will be £362. In August, you will pay tax of £390, which is 20% of £1,952 (£3,000 less the monthly tax free amount of £1,048).

The tax year runs from 6th April to 5th April of the following year. At the end of the tax year, your employer will issue you with a P60 which is an annual summary of your earnings, PAYE and national insurance deductions. Keep and file this as you may need it for self assessment returns or a tax inquiry.

National Insurance

Employees pay Class 1 NI contributions, with the percentage rate of NI you pay, determined by your NI category letter. Most employees have a category letter of A, paying NI of 8% on earnings over £1,048 and up to £4,189 per month. Earnings over £4,189 per month incur NI at 2%.

These bands are the NI thresholds. The primary threshold is £1,048 and the upper earnings limit threshold is £4,189 per month.

NI continued …

For weekly paid earnings, these bands are £242 and £967. Staff paid weekly pay the same percentage rate as monthly paid employees.

Employees under 21 will have a NI letter of M and apprentices under 25 will have a letter of H, both paying NI at the same rate as letter A.

Pensions

Employers have a legal duty to automatically enrol eligible employees into a workplace pension scheme. Under automatic enrolment, your employer must pay a minimum of 3% of your salary into a pension. The minimum legal contribution to an auto-enrolment pension is 8% of earnings over £6,240 and up to £50,270. If your employer contributes the minimum 3%, you will need to contribute 5%. After the 25% government tax relief, you will only pay 4% of your earnings. Employees aged 22 years and over, earning £10,000 or more per annum must be automatically enrolled in a pension scheme. You do have the option to opt out of auto-enrolment, however, you would forfeit the 3% contribution from your employer.

Some employers may have an alternative pension scheme, outside of the auto-enrolment scheme. They will often pay a percentage of your salary into this with any personal contribution from yourself being optional. In this instance, your employer will explain the pension options to you.