Two things you are guaranteed to see on a payslip in the UK are income tax and national insurance (NI) but do you actually know what they are and what they do?
Being on the wrong tax code can have serious implications for your finances and the amount of NI you pay can mean so much more than you think.
Both tax and NI are taken automatically through PAYE (Pay As You Earn) so unless you’re self employed – a whole other story – you don’t need to do anything.
Rather watch than read? Here’s my video on this.
Income Tax
If you earn over £12,570 in the UK (regardless of age contrary to popular belief) you will pay income tax which goes towards public services like education, policing and health.
If you earn over £12,570 you will pay 20% tax, any earnings then over £37,700 are taxed at 40% then any earnings over £125,140 are taxed at 45%.
Another key part of understanding income tax is your tax code, a crucial combination of letters and numbers on your payslip which dictate how much you pay.
The numbers (plus a 0) tell you how much you can earn before paying tax with the letter indicating all manner of things such as M for the marriage tax allowance and S and C for Scotland and Wales respectively (full list here).
Most people have the tax code 1257L which means they can earn £12,570 without paying tax and have a personal allowance.
It’s your responsibility to check your tax code is right and could mean you’re paying too much or too little tax – neither a good thing!
National Insurance
The second payment you will see on a payslip is national insurance (NI) which mostly contributes to your state pension.
If you earn over £12,570 you will pay National Insurance at 12% in addition to income tax.
This payment then dictates your state pension in later life with 30 years of NI contributions required for a full state pension making it pretty important to keep on top of your NI years and the impact of not working.
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