Case study 1

Brian starts work in July and by the end of the tax year on 5 April he’s earned £7,275. That’s more than his personal allowance of,£5,035 so he has to pay tax on anything over that and as he earns £177 a week he has to pay National Insurance too.

HMRC told Brian’s employer how to work out what tax to deduct by telling the supermarket’s payroll department what code number to operate on his wages.

As Brian’s personal allowance is £5,035 the supermarket’s payroll department operated tax code 503L on his wages. 503 because the final figure of the personal allowance gets dropped and a letter gets added – in Brian’s case L, to show it is a code for the basic personal allowance. Code 503L is shown on each of Brian’s weekly payslips.

Brian's wages: £7,275

Take away his Personal Allowance: £5,035

That leaves: £2,240

Brian has to pay tax on £2,240. Anything you earn above your Personal Allowance of £5,035 but below,£7,185 you pay 10% tax on. After that you pay 22%. So Brian pays:

£2,150 at 10% = £215.00
£90 at 22% = £19.80
Total tax £234.80

As Brian has earned £177 every week he pays National Insurance of £8.80 each week
41 weeks = £360.80

Brian has £234.80 tax and £360.80 National Insurance contributions taken from his wages over the year, a total of £595.60 leaving him £6,679.40 take home pay.