Am I Paying the Right Amount of Tax?

You can earn a certain amount of income each year, called your Personal Allowance, before you need to pay any Income Tax. In general, everyone gets the same Personal Allowance of £12,570 for the year 2021-2022. However, you might get less if your income is over £100,000 or if you owe tax from a previous tax year. You might also get an increased Personal Allowance if you have overpaid tax in a previous tax year.

How much can you earn before you need to pay Income Tax?

In the UK, the tax system is based on marginal tax rates. This means it’s worked out as a percentage of income you earn inside certain thresholds and you don’t pay the same amount of tax on everything you earn.

As an employee:

• You pay nothing on earned income up to £12,570 for tax year 2021-22;
• You then pay 20% on anything you earn between £12,571-£50,270 for 2021-22;
• You’ll pay 40% Income Tax on earnings between £50,271-£150,000 for 2021-22;
• For earnings above £150,001, you pay 45% tax.

^{* This assumes you have the standard Personal Allowance of £12570 which is the amount you can earn before paying tax. Your Personal Allowance might be higher, for example if you’ve claimed certain allowances or if you’ve paid too much tax. It could also be lower for example, if you earn over £100,000, the standard Personal Allowance of £12,570 is reduced by £1 for every £2 of income.}

For example, if you earn £52,000 a year*, you pay:

• nothing on the first £12,570
• 20% (£7,540) on the next £37,700
• 40% (£692) on the next £1,730

If you live in Scotland, income tax rates are different.

• You pay nothing on earned income up to £12,570 for tax year 2021-22;
• You then pay 19% on anything you earn between £12,570-£14,667 for 2021-22;
• You’ll pay 20% Income Tax on earnings between £14,667-£25,296 for 2021-22;
• You’ll pay 21% Income Tax on earnings between £25,296 - £43,662 for 2021-22
• You’ll pay 41% Income Tax on earnings between £43,662-£150,000 for 2021-22;
• For earnings above £150,001, you pay 46% tax.

What’s the difference between gross and net pay?

If you’re an employee, the money you earn (your salary or hourly wage) is called your gross pay. When deductions from gross pay such as tax and National Insurance are taken off, the amount you are left with is your net pay. You can see your gross pay and any deductions (if applicable) on the payslip provided by your employer.

How is tax and National Insurance paid?

If your earned income is greater than your Personal Allowance, you must pay income tax. In general, your Personal Allowance amount is spread evenly across your pay packets for the year and your employer will take out tax before giving you your pay. They know how much to take out through a system called PAYE (Pay As You Earn). If it turns out at the end of the year you have paid too much tax, you can get a refund; too little and you will have to pay extra, usually in the following tax year.

Your employer will also make National Insurance deductions from your pay. These are calculated on a weekly or monthly basis, or however frequently you get paid. Unless there has been a mistake, you cannot claim back any of the National Insurance you pay, even if your earnings fall later in the year.

How PAYE works

When you start a new job, you’ll either need to provide a P45 form from your last job, or complete HMRC’s new starter checklist, which you can get from your employer. These forms tell HM Revenue & Customs (HMRC) that you’ve started work and will be used to create your personal tax code. Your tax code then informs your employer how much tax to take from your pay. PAYE might also be used to collect tax on your earnings from any other income you have.

What is a tax code and how is it worked out?

Your tax code is normally the amount you can earn without paying tax, divided by 10, with a letter added.

For example:

Tax code: 1185L

1185 becomes £11,850 earned before tax.

The amount of tax you pay depends on:

• How much income you have;
• How much tax you’ve already paid in the year;
• Your Personal Allowance.

Different people have different tax codes, depending on their circumstances.

Every year, HMRC sends out a Coding Notice telling you what your tax code is and how much tax you’ve paid.

You can also find your tax code on your payslip. It’s usually made up of a few numbers and a letter.

Tax Codes

• L – You're entitled to the basic tax-free Personal Allowance
• M – Marriage Allowance: you've received a transfer of 10% of your partner's Personal Allowance
• N – Marriage Allowance: you've transferred 10% of your Personal Allowance to your partner
• 0T – Your Personal Allowance has been used up, or you've started a new job and don't have a form P45, or you didn't give your new eployer the details they need to give you a tax code
• BR – All your income from this job or pension is taxed at the basic rate (usually used if you've got more than one job or pension)
• D1 – All your income from this job or pension is taxed at the additional rate (usually used if you've got more than one job or pension)
• NT – You're not paying any tax on this income

Do you have the right tax code?

Sometimes your tax code may not be correct for your circumstances. For example, if you started work recently and your correct tax code hasn’t been adjusted before your first pay day, you may be on an ‘emergency tax code’. This means you might not be given the right Personal Allowance for you at outset.

How do I check my tax code?

To make sure you have the correct tax code you can check your code matches the Personal Allowance you expect to be receiving.

Tax codes

You can also find out more information on how the numbers and letters in your tax code relate to your pay by visiting the Money and Tax section of www.direct.gov.uk or by contacting HMRC on 0300 200 3300

A guide to understanding tax codes, allowances and reliefs can be found on the following UK Government website: https://www.gov.uk/government/publications/rates-and-allowances-income-tax. Don't assume that your tax code is correct as many aren't!

Benefits in kind

Sometimes your employer may offer employee benefits such as a company car or health insurance as part of your remuneration package. These are known as ‘benefits in kind’. You may need to pay tax on the value of these benefits.

• Some benefits are always tax-free, such as employer contributions into a pension scheme for you, or childcare vouchers up to a limit.
• Some benefits are always taxable. For example, products that your employer lets you have for free or below cost price.
• For some benefits it depends. For example, season-ticket loans are taxable if the value of all employer loans you get is more than £10,000 for the year.

The content of this article does not constitute individual financial advice.