If you’re employed, you pay tax on your wages through a system called Pay As You Earn (PAYE). Your employer uses this system to deduct Income Tax and National Insurance contributions from your wages before you are paid.
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The amount you earn before tax and National Insurance are deducted is your 'gross salary'. The amount you receive after tax and National Insurance have been deducted is your 'net salary'. When you get a payslip, you'll see:
As well as being taxed on your pay, you're also taxed on benefits your employer provides, such as a company car, fuel, a low interest loan or medical insurance. You may also have to pay tax on any tips you receive as part of your job.
Tax and National Insurance on tips and bonuses
Income Tax is your contribution to government spending on things like transport, health and education. How much you pay depends on how much you earn.
HM Revenue & Customs (HMRC) gives you a tax code, which you'll see on your payslip. Your employer uses your tax code to work out how much Income Tax to deduct from your wages through the PAYE system.
At the end of each tax year your employer will give you a form - your P60 End of year certificate - showing your total gross pay for the year and how much tax and National Insurance you've paid.
Income Tax rates and thresholds
You pay National Insurance contributions to build up your entitlement to a State Pension and other social security benefits. How much you pay depends on how much you earn. If you earn over a certain amount, your employer deducts Class 1 National Insurance contributions from your wages through the PAYE system.
You pay a lower rate of National Insurance contributions if you’re a member of your employer’s ‘contracted-out’ pension scheme, or you’re a married woman - or widow - who holds a valid ‘election certificate’.
Your employer also pays employer National Insurance contributions based on your earnings and on any benefits you get with your job for example a company car.
HMRC keeps track of your contributions through your National Insurance number. This is like an account number and is unique to you.
National Insurance contributions - the basics
National Insurance contributions rates and thresholds
Paying reduced rate National Insurance contributions
Everyone can earn a certain amount each year without paying any Income Tax. This is called your Personal Allowance. In 2013-14 the Personal Allowance is £9,440. Some people can earn a bit more before they start paying tax, if they're born before 5 April 1948, for example.
There are a number of other allowances and reliefs you may be able to claim to reduce your tax bill - and in some cases mean you’ve no tax to pay. Follow the last two links below to find out more.
Personal Allowance - find out more
Introduction to tax allowances and reliefs
Tax allowances and reliefs - employees or directors
You can earn up to £149 a week (2013-14) before you pay any National Insurance contributions. This is known as the 'primary threshold'.
However, as long as you earn more than £109 a week (2013-14) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the 'lower earnings limit'.
You may be able to ‘defer’ some of your contributions to prevent an overpayment if both of the following apply:
To apply you can either complete form CA72A Application for deferment of payment of Class 1 National Insurance contributions, or write to:
HM Revenue & Customs
National Insurance Contributions & Employer Office
Deferment Services
Longbenton
Newcastle upon Tyne
NE98 1ZZ
The deadline for applying is 14 February in the relevant tax year.
Go to form CA72A Application for deferment of payment of Class 1 National Insurance contributions
If you are over State Pension age and carry on working you will need to provide your employer with proof of your age so that you don’t continue to pay National Insurance contributions unnecessarily. You can use a birth certificate or passport or apply to HMRC or the Department for Work and Pensions for an ‘Age Exception Certificate’. To find out more read the HMRC guide ‘Making sure you’ve stopped paying National Insurance’.
Making sure you’ve stopped paying National Insurance
You pay Income Tax on your earnings in the same way as other employees. However, your National Insurance contributions are worked out over an ‘annual earnings period’ - from 6 April to the following 5 April - rather than over the normal weekly or monthly periods that apply to other employees. This is to make sure you pay the right amount of National Insurance contributions.
Although your contributions are worked out over a different time period, your employer may be able to make special arrangements that allow you to pay them weekly or monthly like other employees.
Starting your first job: what to do about tax and National Insurance
Tax when starting, leaving or retiring from work
Tax and National Insurance if you’re both employed and self-employed
Tax if you’re employed and getting a pension
Claiming back overpaid National Insurance contributions
Reclaiming tax if you’ve overpaid through your job
