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Understanding your first pay cheque

By Elliot Ashdown
Understanding your first pay cheque

Many of us simply get given out pay cheques, look at the amount we have been paid and put them to one side. However, it is important to understand what your pay-slip actually means, and what the taxes and deductions are for. Occasionally anomalies or mistakes can be made, so it’s important to spot these as soon as possible.

Gross and Net pay

For a start, you need to check whether your Gross Pay matches the salary on your contract. There can be errors which could be worth a fortune to the individual. Simply multiply the gross figure by twelve and it should correspond with your agreed salary.

Your Net Pay is where it starts to become more complicated, as this is the figure you arrive at when you take off all of the deductions: NI, Pension, PAYE Tax, Student Loan and anything else that may be relevant to your circumstances.

Tax Band

Tax Band Amount
Untaxed Below £10,000
20% tax bracket £10,000 - £41,865
40% tax bracket £41,866 - £150,000

Remember that UK taxbands are marginal tax bands, and you’ll only pay the elevated rate of tax on the money earned over and above the upper limit. This is why someone on £42,000 (40% tax) obviously doesn’t pay drastically more tax than someone on £39,000 (20% tax).

National Insurance

National Insurance (NI) is a complicated tax that many UK politicians think we should get rid of. It was originally designed for health and unemployment insurance, and therefore a timely reminder as to why we pay tax. Most NI payments will fall into the Class 1 or Class 2 categories: Class 1 is for all employees on payroll, and Class 2 is for the self-employed (although these can be forfeited if you’re a low earner).

The majority of UK workers will pay 12% on earnings between £153 and £805. You’ll notice that the NI threshold is lower than the tax threshold, at £7,956 P.A.

Other deductions

Any pension contribution or charitable donations you may have signed up for, such as GAYE (Give as You Earn), should appear on your wage slip. The Student Loan threshold now stands at £21,000, meaning that each year, you’ll pay back 9% of any income over £21,000.

As active UK citizens, our pay cheque is our right, and we need to be ready for errors when they occur in busy payroll departments.

If you’re still unclear on how your pay is worked out, why not check out some of these resources:

Tax Calculator: http://www.gocompare.com/money/tax-calculator/
Understanding your student loan repayments: https://www.gov.uk/student-finance/repayments
What is PAYE? : http://www.hmrc.gov.uk/payerti/getting-started/paye-basics.htm

Tagged: work, money

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