Most of the time when we receive our payslip, we do not understand the money that we have been paid or how our net income has been calculated.

So, in this blog post, I would like to explain how a taxpayer can decode their payslip.

There are various factors that could determine the net income on the payslip of a tax payer.

Some of the factors are shown below:

1.The Tax code on the Payslip:

The tax code on the payslip is a major factor that determines the amount of tax that is paid.

A tax code is a set of numbers and an alphabet that is derived from an individual’s personal tax situation.

The base figure that is used is the personal tax allowance that everybody is entitled in the UK.

 In the tax year 2020/21, the tax code is 1250L. This is derived from personal tax free allowance of £12500, this might change yearly.

If you would like to read more about tax code, kindly click https://taxgirl.co.uk/are-you-paying-the-right-tax/

2. The national insurance deduction

Another deduction made from the income paid by taxpayers is national insurance.

The national insurance is deducted when the taxpayer earns over a certain threshold.

The primary threshold for the weekly paid taxpayer is £120, for monthly earners £520 and £6240 for yearly earners.

The rate applied on the excess is 12% for the primary threshold.

When a taxpayer earns over the secondary threshold, they pay 2% on the amount over the threshold.

Also, taxpayers have codes.

The main one you need to be aware of is the national insurance letter.

Most taxpayers have letter A for their national insurance.

At times, this letter might be different depending on the circumstance of the taxpayer such as if the person is widowed, married or over state pension age.

So, if your national insurance letter is not A, you can contact HMRC to clarify.

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3.Pension Deduction

Another deduction that might be taken out of your payslip is your pension deduction.

Since the inception of auto-enrolment, your employer has the duty to deduct your pension contribution.

You have the option of opting out within a certain time.

However, if they decide to opt-out they might be losing out some of the benefits.

The main reason is that the employer also contributes as well as a tax benefit for the deduction.

Before pension is deducted, the taxpayer has to be earning over the qualifying earning threshold.

 The yearly qualifying earning for 2020/21 is £6240. If paid weekly it would be £152 and monthly £520.

The minimum contribution by the taxpayer is at 4% and employers 3% and contribution from the government at 1%.

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4.Student loan deduction

Another deduction that can be taken off your payslip is student loan.

If you have ever received student loan probably when you were in university or a postgraduate loan, as soon as you earn over a certain amount this will be deducted automatically.

It depends on the type of student loan you have got, probably Plan 1 or Plan 2.

Student Loan Plan 1 is the student loan deduction that applies to the student that started their course before September 2012.

The deduction for them is 9% of earnings that goes over the threshold of £19,390.

The Student Plan 2 applies to students that started their course after September 2012, the deduction will be 9% of earning over the annual threshold of £26,575.

For Postgraduate loan, the deduction is calculated at 6% of earnings above the threshold of £21,000.

Conclusion on decoding your Payslip.

When next you receive your payslip and it doesn’t seem right. Get professional help to ensure that you are paying the right amount of tax.