Do you know how much money is taken from your pay cheque each month and why? In this short guide we explain the taxes you pay and how these can be reduced.
The biggest slice taken is income tax, aka Pay As You Earn (PAYE). The first £11,850 you earn is tax free. After this, tax is applied in brackets and increases from 20% to 40% to 45% as you earn more.
Tip: HMRC calculate your tax based on what they think you're paid. So if your work situation changes, like earning less when you go on maternity leave, you should notify HMRC so they can tax less or repay some tax.
It doesn’t stop at income tax, you also pay National Insurance (N.I.) if you earn more than £157 a week (£8,164 a year).
How much N.I. do you pay?
Nothing on first £157 a week. 12% on the earnings above this to £866 a week. Then 2% on anything higher.
That's confusing, Gimme an Example
If you earn £1,000 a week, no N.I. is paid on first £157, 12 % (£80) on next £709 and 2% (£3) on next £134. A total of £83 a week.
How can you reduce tax?
You can completely avoid paying income tax on any portion of your salary you place in a pension. If it's a work pension, the most efficient way to do this is via 'salary exchange' which means your pension is deducted before income tax and N.I. is charged. This is a mega saving especially if you earn over £46,350 and pay 40% or more in income tax.
Side note: Paying into a pension can reduce your income which is an important consideration if you need to stay below a certain level to receive benefits. For example, both you and your partner have to be below £50,000 to receive Child Benefits or you both need to earn less than £100,000 to take advantage of the Tax Free Childcare Scheme which saves you £2,000 a year per a child.
How do HMRC know how much I get paid?
When you start a new job you are asked for your P45. This shows how much tax you've paid on your salary so far in the tax year (April 6th to April 5th). Your employee sends part of this form to HMRC who issue you a new tax code.
Where does your tax go?
In 2016/2017 the government collected £304 Billion from N.I and income taxes. A huge chunk of this is spent on Welfare (‘Social Protection’), Health, State Pensions and Education. After these major spends, the next largest is £39.4 Billion paying interest on national debt, ouch!