Tax & National Insurance


What it is....

An Introduction
You will be paying tax in some way or another whether you are a student, working or claiming benefits. Here we try to explain what tax is, what it is used for and when and how you will have to pay it. National Insurance could also be thought of as a tax so we’ll explain that as well.
Tax is the way the Government raises money to pay for services such as the National Health Service (NHS), education, housing and roads. The different rates of tax are set each year by the Chancellor in his budget speech. There are many different types of tax. Outlines below are the main ones which will affect you.

Income tax

  • This is paid on your overall ‘taxable income’ during the year. Much more about that later.

Tax paid when you buy, sell or give things away

  • Capital Gains Tax which has to be paid if you sell or give away certain assets - currently between 10% and 28% over an annual limit of £11.500.
  • Stamp Duty which has to be paid when you buy property or shares - currently 3% of the purchase price on average.
  • Inheritance Tax which is taken from your estate (all of your wealth) when you die - currently 40% over a threshold of £325,000.

We shan’t concentrate too much on these at this point.

Tax on goods and services

  • Value Added Tax (VAT) on many everyday purchases and services - currently 20%.
  • Fuel duty on petrol and diesel - currently 58p per litre.
  • Excise duty on tobacco and alcohol.

Tax on local services

  • Council tax which helps to pay for local service like policing and waste collection - about £1,500 per year on an average home.

You can see that you can’t evade paying tax! In fact it is a criminal offence to do so. We will look at some of these taxes in more detail with special attention on those that you will face as a student or when you go to work for the first time. Before that it is worthwhile making a distinction.....

Gross salary

  • What you have earned including bonuses before any deductions

Net Salary

  • What you take home - after tax, National Insurance contributions and student loan repayments have been made

Income Tax
Personal Allowance

  • Everyone who earns less than £123,000 per year is allowed to earn a certain amount of taxable income without paying tax on it.
    • This year (2018/19) it is £11,850.
    • However if you are employed you may get some benefits which will partially offset this allowance.
  • Taxable benefits are.....
    • Company car.
    • Fuel paid for by your company.
    • Medical insurance.
    • Living accommodation.
    • Loans at low interest rates.
  • Taxable income is.....
    • Earnings from employment.
    • Pension income.
    • Interest on most savings.
    • Income from share dividends.
    • Rental income.
    • Income you receive from a trust.
    • Some state benefits - job-seekers allowance, incapacity benefit.
  • Non-taxable income is.....
    • Income from tax exempt accounts, like National Savings accounts.
    • Premium bond wins.
    • Interest on ISAs (tax free savings accounts)
    • Other state benefits.

What Is A Tax Code?

  • You are made aware of your final personal allowance by your tax code.
    • This is sent to you by post each year.
    • It also appears on you wage slip each month.
  • It will appear as a number followed by a letter such as 1185L
    • This means that you can earn £1,185 x 10 (£11,850) of taxable income before tax.
    • The L just shows that you are eligible for the basic Personal Allowance.
  • When you first start a new job you maybe given an emergency coding while your situation is sorted out. Don’t worry, any overpaid tax will be calculated and you will pay less later in the year when you get your real coding.

How Much Income Tax Will You Pay?

  • You only pay tax on what you earn above your allowance after the taxable benefits have been taken into account.
    • How much you pay depends on how much you earn above your allowance.
    • If you earn £0 - £34,500 above your personal allowance you pay the basic rate which is 20%
    • If you earn £34,501 - £150,000 above your personal allowance you pay the higher rate which is 40%
    • Anything you earn over £150,000 you will have to pay the top rate which is 45%
    • Let's look at an example....
      • If you earn £57,000 in the tax year (which runs from 6th April in one year to 5th April the next) you should pay....

    0% on £11,850 (if you get full personal allowance)       =    0
20% on next £34,500                                                               =    £6,900
40% on £10,650 (£57,000 - £11,850 - £34,500)               =    £4,260
So your tax bill for that year should be                                       £10,160

  • If you are an employee, your total tax bill isn’t all taken at once. The expected amount is divided into 12 parts and taken from your salary each month.
  • This is called PAYE or Pay As You Earn.
  • If you are self-employed you will have to set aside some money each month for tax and pay it in one lump when you are asked to by the authorities.

Paying The Right Amount

  • So that you don’t over pay, or under pay any tax you will have to fill out a tax return every so often although it won’t be more than once a year.
    • It’s a simple process that can either be done on a paper firm or online.
    • Your employers will give you most of the figures that you will need.
  • Make sure that you keep a note of any charitable donations you made throughout the year where gift-aid was claimed.
  • This allows the Revenue to compare what you should have been taxed with what you have been taxed.
  • They will take any underpaid tax buy adjusting you tax code next year or they will send a payment direct to your bank account with any overpaid tax.
  • Forms You May Need
    • P45 will be given to you by your employer when you leave work. If you lose it you can’t get another! It shows......
      • Your tax code and PAYE reference number
      • Your total pay for the tax year and the tax that’s been deducted.
      • Your National insurance number.
      • The date you left work.
    • P46 Will be given to you by a new employer if it is your first job. You will have to complete it and it will be used to work out the initial amounts of tax you will have to pay. You will have to state.....
      • That it is your first job.
      • If you have been claiming job-seekers allowance.
      • If you have another job.
      • If you are paying off a student loan.
    • P60 Will be given to you every year by your employer. You will need it to complete your tax return.  If you lose it your employer will be able to get you another one. It shows......
      • How much you have been paid in that tax year.
      • How much tax has been deducted.
    • P11D Will be given to you by your employer every year. If you lose it your employer should be able to give you another one. It shows.....
      • The value of any benefits in kind that you have had in that tax year. These may include, company car, medical insurance, interest free loans.

What If You Only Work Part-Time Or Over The Holidays?

  • If you work for an employer, the employer must.....
    • Deduct tax and National Insurance contributions from your wages.
    • Give you payslips.
    • Deduct student loan repayments, if you are earning enough.
    • Give you a P45 when you leave.
    • Give you a P60 each year.
    • Give you holiday pay.
    • Give you the national minimum wage.
    • Protect you from discrimination
  • The employer must not.....
    • Pay you cash in hand
  • If you don’t want tax deducted from your earnings because you will earn less in total than your personal allowance you should ask your employer for a form P38S Student Employees.

National Insurance Contributions (NIC)

  • These are deductions directly from your earnings if you earn over a certain amount.
  • They go towards your state pension.
  • If you don’t keep up you NI contributions it will affect not only your state pension but also things like Job-seekers Allowance and Statutory Sick Pay.
  • You are given a NI number at age 16. You will need this throughout your life.
  • You can currently (2018/19) earn up to £8,424 before having to pay any NI contributions.
    • This is called the primary threshold.
  • Providing you earn £6,032 you can still build up your State Pension entitlement.
    • This is called the lower earnings limit.
  • You pay 12% of your earnings between £8,424 and £46,350
  • You pay 2% of your earnings above £46,350

Keeping Records

Keep the paperwork that contain details of your pay and tax safe. This will help you complete your tax return, apply for benefits and tax credits and reclaim overpaid tax. Things like.....

  • Payslips and PAYE notices.
  • P45 and P60 forms.
  • Details of taxable expenses.
  • P11D
  • Information about any redundancy award or termination payment.
  • Certificates for 'Tax Awarded Schemes'.
  • Notes of tips that you have received.
  • Details of State benefits you have received.

Wize Tips

  • You get a personal allowance which represents earnings that you don’t have to pay tax on.
  • Keep your National Insurance number safe.
  • Keep your P45, P60 and P11D safe when your employer gives them to you.
  • Get your tax return in on time - it will cost you if it’s late.
  • Don’t evade taxes - its a criminal offence.
  • Keep records.