For many people, the first pay check can come as a bit of a shock. In the UK, things like income tax, national insurance and student loans will come directly out of your wage before the money hits your bank account. On the plus side, this means you don’t need to worry about paying these things yourself; however, it can be troublesome when you’ve budgeted according to your full wage. To avoid being caught out, use this guide to calculate exactly how much you’ll receive.
Meet Fernando the frog trainer. Fernando is about to start working for Leapfrog Ltd, who have promised him an annual salary of £15,000. This works out at £1,250 a month. Let’s figure out how much he’ll actually receive.
Income tax is the amount the government takes from each working person, to help pay for public services such as the NHS, police, education and the welfare system, as well as public projects such as roads, railways and housing.
To figure out how much income tax he’ll pay, first Fernando needs to know his Personal Allowance – the amount he can earn without paying tax.
The Personal Allowance is currently £12,500 a year for most people, meaning Fernando only needs to pay income tax on the remaining £2,500.
Income tax for most people is 20% (it can be more if you’re on a high salary).
So Fernando will pay income tax of 20% of £2,500 (0.2 x 2500), which is is £500 a year, or £41.67 a month.
Through paying National Insurance, Fernando will be entitled to certain state benefits, such as a state pension and paternity allowance.
There are different classes of National Insurance, and the class you pay depends on your employment status and how much you earn. Most people who are employed (rather than self-employed) will pay Class 1 National Insurance. For details on all National Insurance classes, click here.
You only need to pay National Insurance if you earn above £702 a month, or £162 a week. You will only pay National Insurance on the earnings you make above that threshold.
Fernando earns £1,250 a month, meaning he will pay National Insurance on £548. The Class 1 National Insurance rate is 12% (click here for current rates). 12% of £548 is £65.76, so he’ll pay National Insurance contributions of £65.76 each month.
Because Fernando is over the age of 22 and earning more than £10,000 a year, Leapfrog Ltd have enrolled him onto a workplace pension scheme, which is awesome because it means he’ll receive extra financial support when he retires.
The minimum contribution Fernando can make is 5%, and his employer will contribute an extra 3%. This means that 8% of his income - £1,200 a year – will be added to his pension pot. When he retires, he’ll be able to claim this back, along with tax relief, which is 20% of his own 5% contribution, i.e. £150 a year.
The total pension amount leaving Fernand’s salary will be £750 a year, or £62.50 a month. In return, he’ll receive £1,350 a year – not bad!
Worth knowing: You can opt out of the work place scheme, but it’s usually a good idea to stay in if you’re eligible, and perhaps even increase your minimum contributions. The earlier you start saving for your pension, the less you’ll actually ‘feel’ the loss.
Because Fernando took out a student loan to pay for his frog training degree, he will also have to pay this back at some point. As it stands, however, he’s under the threshold for repayments.
The current repayment thresholds are:
- £480 a week
- £2,083 a month
- £25,000 a year
If, for instance, Fernando earned £28,000 a year, he’d have to pay back 9% on his earnings above the £25,000 threshold, i.e. £3,000. 9% of £3,000 is £270 a year, or £22.50 a month.
For more information on student loan repayments, click here.
Fernando’s take-home pay
Now we know how much will leave Fernando’s wage automatically, we can calculate his take-home pay:
Other things to be aware of
If you’re about to start your first ever job, or you haven’t got a P45 from your previous job, you may be emergency taxed at first.
Emergency tax occurs when HMRC don’t have enough information about you to give you a proper tax code. You’ll be issued with an emergency tax code instead until HMRC do have that information, and this can sometimes mean that you’ll be taxed on the entirety of your income (rather than just the amount above your Personal Allowance).
There are ways you can avoid paying emergency tax:
- Complete your Starter Checklist, which will help HMRC to gather the right information. This should be offered by your employer, but if not you can find it here.
- If this isn’t your first job, get your P45 from your previous employer and give it to your new employer as soon as possible.
Once HMRC have your correct tax code, they’ll refund you any tax that you overpaid.
You may be owed tax if you started working part way through the tax year
If you’ve paid tax and stopped working part way through the tax year you may be able to claim a refund. Use HMRC’s tax checker to find out if you might have paid too much tax, or contact HMRC.
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