More than 30 million people work for an employer and are paid their wages through the PAYE (Pay As You Earn) system. The employer uses the PAYE system to deduct Income Tax and National Insurance contributions from the employee’s wages before paying the person.
As well as being taxed on pay, people may also be taxed on benefits their employer provides, such as a company car, fuel, a low interest loan or medical insurance. They may also have to pay tax on tips they receive as part of their job.
IMPORTANT FACTS – Pay-slips
An individual’s payslip should show (marked with red numbers on the above example payslip):
- the gross salary earned including any bonuses
- how much Income Tax has been deducted
- any National Insurance contributions that have been deducted
- any student loan repayments and pension payments, if relevant
- take home pay, or the net salary actually received
To find out take home pay for any gross salary see this easy to use calculator.
IMPORTANT FACTS – Tax Codes
A tax code is used by the employer or pension provider to calculate the amount of tax to deduct from a person’s pay or pension. If they have the wrong tax code a person could end up paying too much or too little tax.
A tax code is usually made up of several numbers and a letter, for example: 117L or K497. For more details of tax codes see here.
The most common tax code for the 2020/21 tax year is 1250L(labelled with a 6. on the payslip) This is for those eligible for the basic Personal Allowance, it is also used for ’emergency’ tax codes.
If HMRC change the tax code, the person should receive a PAYE Coding Notice from their Tax Office. It is advisable to keep all notice of coding letters for reference.