Hurrah! You've been working in your new job for a couple of weeks and then payday rolls around. Finally, your first proper wage. Yeah, so you had part-time jobs in the past, but this is the real deal.
Then you look down at the net total. What’s that? Where has all your money gone? Yup, the government have taken their share. Whether you think there’s been a mistake or you’re just generally confused as to where that money goes, we’re here to help.
What is tax?
Whether we like it or not, we all have to contribute to society’s public services, which include the education system, benefits and the NHS. While there are all sorts of taxes on the things we buy and services we use, every UK citizen has to pay an income tax on what they earn. This is why you hear people complaining that 'only two things in life are certain: death and taxes'.
PAYE tax
Anyone in full-time employment contributes Pay as you Earn (PAYE) tax. You never actually see this money apart from on your payslip, which you’ll receive each month (or weekly if you’re paid more regularly). It just appears as a – probably larger than you wanted – deduction number.
On, or shortly after, your first day at work you’ll be asked to fill in a P46 tax form. This is a simple form that lets the taxman (boo hiss) know that you’ve started working. They will then issue you with a tax code, based on your circumstances, which sets the rate at which you pay tax. This is mainly dependent on how much you earn.
What's taxable?
The following are all considered taxable:
- Salary and any additional working income
- Employee benefits
- Partnership profits
- Income from property
- Interest on savings and investments
It is your responsibility to ensure that your taxes are paid. If, for whatever reason, you’re not paying and you think you should then don’t go burying your head in the sand. You could be walloped with a huge tax bill further down the line. If in doubt, contact the HMRC.
National insurance
On your first payslip, you’ll notice that two payments are taken. National Insurance is a second tax on earnings and is what entitles you to state benefits, including the NHS. These contributions also go towards your state pension when you finally retire, and unless you’ve made an adequate amount of contributions it will affect what your entitlements are later in life. If for whatever reason you lose your job, it also goes towards welfare benefits while you try to get another job.
If you have a full-time job now, you’ll be making 'Class 1' contributions. The contribution you make varies if you’re self-employed and you can make voluntary payments.
What is taxable?
It’s important to remember that everything you earn is taxable. If you work in a job that earns you commission and bonuses, make sure when budgeting that you account for the fact that these too are taxed. This is also true of overtime, sick pay, maternity pay and paternity pay.
Personal allowance
Not all of your pay is taxable in most cases. There is what is known as a 'basic personal allowance' of £7,475 (for anyone aged below 65), which means you have to earn at least that much in a year before paying anything. There’s also a threshold for National Insurance. In 2010-11, National Insurance contributions for employees are 11% of earnings between £110 and £844 a week (that’s £5,715 and £43,875 a year) and then 1% on any earnings above that.
Student loan
What’s that? MORE money coming out! Don’t forget the dreaded student loan, which you may be eligible to start paying back now that you’re earning. Read our full guide to student loan repayments for full details on this additional ‘tax’.
For more information
If you’re confused about anything, think that you’re over- or under-paying tax or just have a few questions then you can ask your HR department or speak directly to the tax office…
Find jobs today
Search for internship positions
Search for part-time jobs
Search for full-time graduate jobs
