What is income tax?

There’s nothing quite like the excitement of receiving your first payslip. But seeing what’s deducted from your salary can come as a shock. We’ve checked the small print and have broken down the essential income tax details for you.

Why must I pay Income Tax?

Anyone earning over £11,500 a year is liable to pay Income Tax. Income Tax is money collected by the government to pay for everyday services. And while seeing money missing from your hard-earned cash might be tough, remember you’re paying towards facilities like hospitals and schools, and making a valuable contribution to society.

What do the terms GROSS and NET mean?

Your gross pay is the amount you have earned before any deductions have been made. Your net pay is what is actually paid to you after Income Tax, National Insurance and other charges have been applied. Check out our payslips explained video for the lowdown on your pay.

How does my employer know what to charge?

If this is your first job, your employer will ask you to fill in a form. After this, your local tax office will issue you with a tax code every year which lets your employer know the amount of Income Tax you’ll be paying. This is usually done using a PAYE (Pay as You Earn) system, meaning your employer will deduct the money before paying you.

How much will I pay?

All taxpayers have a Personal Allowance. This is the amount of money you can earn per year before you pay any Income Tax. At the moment, if you earn less than £11,500 you won’t pay any Income Tax; if you earn more than that you’ll only pay Income Tax on what you earn on top of £11,500.

How much Income Tax you pay depends on how much you earn. If you earn between £11,501 and £45,000 you’ll pay 20% (the ‘basic rate’ of Income Tax). If you earn more than £45,000 you’ll pay 40% on the amount over £45,000 (but still 20% on the amount between £11,501 and £45,000).

So how much does this mean you will pay each month?

On a salary of £18,000, your taxable income would be £6,500 (£18,000 minus £11,500). You’d pay 20% Income Tax on that £6,500 so your Income Tax would be £1,300 per year, or around £108 per month.

For a £50,000 salary you’ll pay 20% tax (£6,700) per year on the amount between £11,501 and £45,000; then you’ll pay 40% (£1,999) on the amount above £45,000. The total tax you’ll pay is £8,699 a year, and around £725 a month.

What is National Insurance?

National Insurance helps fund benefits, including pensions, maternity allowance, unemployment benefit and sickness benefit. According to Money Advice Service, you pay National Insurance on any income over £157 per week and the rate is 12% unless you earn over £866 per week.

The maths part:

On a salary of £18,000, your weekly gross pay would be £346.15.

You would pay National Insurance on £189.15 of this weekly income which works out as £22.70 per week, or about £98 per month.

This doesn’t look right

Occasionally, when you start a new job, you may not receive a tax code in time, meaning your employer may have to apply ‘Emergency Tax’. This sounds drastic, but don’t panic - your pay should be adjusted once the correct code is received and you will receive a rebate of anything you’ve overpaid.

It’s also possible to receive the wrong tax code. If things don’t look right, it’s worth checking with HMRC.

How can I find out more?

If you think you’ve paid too much or too little tax, or have a query, contact HMRC who will be able to help.