Financial Planning

Understanding Your Payslip: A Guide To Income Tax & National Insurance

Understanding Your Payslip: A Guide To Income Tax & National Insurance


Perhaps it’s your first job, or maybe you’ve got decades of employment experience behind you. It helps to know how pay works, and how it relates to tax, national insurance and contracts.


For employed people, you usually get a payslip each month outlining your gross pay (before tax and deductions) and net pay (after tax & deductions).


Your deductions can vary each month, so your payslip should show how it varied from the previous month if this turns out to be the case. Deduction should be shown as separate items on the document (e.g. trade union membership).


However, there is other important information included as well…


Key Components of a Payslip


Freelancers and contractors do not have a right to a payslip, but casual staff and employees do.


It can be sent to you in written form, or electronically. Either way, you are entitled to receive it leading up to your payment, or at the same time.


Your payslip will contain your payroll number, national insurance number, rate of pay, tax code, the tax period (also known as the financial year) and additional payments (e.g. overtime, bonuses and commission).


Sometimes your employer can pay expenses to you via payroll. If so, this should show on your payslip as a separate item.


If you’re contributing to a workplace pension, then this should show as a distinct line detailing the amount. Your employer’s contributions is sometimes shown too.


For those with student loans, you will likely start repaying this from your salary once you start earning enough. When this happens, it should also appear on your payslip.


Sick pay will also be shown on your payslip if applicable.


Maternity, paternity and adoption pay will also appear on your payslip when you take leave.


If you claim any workplace benefits, such as a gym membership or company car, then these should be listed as distinct items on your payslip. Please note that this can affect your tax code.


How This Ties Into Your Taxes


So that’s your payslip in a nutshell, but what about taxes?


The main tax that concerns you as an employee will be Income Tax. This is the tax that is applied to employee wages and salaries, and it is used largely to pay for public services (e.g. NHS, housing and the welfare system).


You only start paying income tax on your salary once you start earning over a certain amount (known as your Personal Allowance). In 2018-2019 the threshold is £11,850.


Everyone is entitled to this Personal Allowance, unless you earn over £100,000 per year. At this point, this £11,850 Personal Allowance is reduced by £1 for every £2 you earn.


For those earning over £11,850, you are taxed differently depending on your earnings and circumstances. For instance:


  • If you earn between £11,851 and £46,350 then your earnings over £11,850 will be taxed by 20%. This is called the Basic Rate tax band.
  • For those earning between £46,351 to £150,000, this puts you in the Higher Rate tax band. Any income earned over £46,350 is taxed at 40%.
  • The Additional Rate tax band applies to people who earn over £150,000. Any income earned over this amount is taxed at 45%.


So, as an example, here’s what would happen if you earned £60,000 per year:


  • The first £11,850 wouldn’t be subject to Income Tax.
  • The next £34,499 would be taxed at 20%.
  • The remaining amount would be taxed at 40%.


What About National Insurance?


Both you and your employer pay National Insurance contributions as a tax based on your weekly earnings. In 2018-2019 you start paying it once you earn over £162 per week.


After that, you pay 12% on weekly earnings between £162 and £892. Any weekly income above that is taxed at 2%. So, for example if you earn £900 a week:

  • You pay no National Insurance on the first £162
  • You pay 12% on the next £730 (i.e. £87.60)
  • Then 2% on the remaining £170 (i.e. £3.40)


Paying National Insurance builds up your entitlement to the State Pension, and is taken from your pay together with your Income Tax before your wages are paid.


On the wider scale, National Insurance is used to fund state services and benefits, including the NHS, State Pension, disability allowances and benefits for the unemployed.


Be aware that National Insurance is not dealt with annually, like Income Tax. It applies to each of your payslips. So if you earn more one month, you will be taxed more NI for that month.


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