You might be wondering: How much Tax and National Insurance will I pay? Right! You (as an employee) are liable to pay Income Tax and National Insurance on your gross income through a system known as PAYE. While paying, you have to ensure that you’re paying the right amount as per your tax code.
We’ll be discussing the following points in this blog:
- Income Tax and National Insurance- Do you need to pay?
- Who’s liable to pay Income Tax?
- National Insurance – How much should you earn before paying?
- Procedure to pay Tax and National Insurance
- Understand PAYE System
- What is the Tax Code and How to calculate it?
How much tax and National Insurance will I pay?
Before paying any income tax, the government provides an amount known as Personal Allowance to you on an annual basis. But usually, everyone doesn’t get the opportunity to receive a personal allowance of £12,500 for the tax year 2020/21. A tax year starts from 6th April to 5th April of the next year.
Personal Allowance is an allowance that helps you to avail of that income without tax obligations. You may get a small portion of your personal allowance if your income exceeds £100,000 or if you haven’t paid tax from the previous tax year.
For now, personal allowance is £12,500 for 2020/21 and it may rise as per Consumer Price Index (CPI) for the next year.
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Who’s liable to pay Income Tax?
The tax system of the UK operates under marginal tax rates. It means you are liable to pay a certain percentage of tax from your income. It’s not fixed, it varies as per your income.
This table will show how much you (as an employee) have to pay tax on your income.
Government tool is here through which you can easily estimate the Income Tax and National Insurance you have to pay in a year. With the help of this tool, you can find out your take-home pay if you have no other deductions like student loans or pension contributions.
If you’re self-employed, you can use this tool to budget your self-assessment tax bill.
National Insurance – How much should you earn before paying?
National Insurance Contributions are deducted from your income by the government so that you’ll qualify for certain state benefits like state pensions and maternity allowance.
Employees need to pay Class1 National Insurance from their earnings. Moreover, employers should pay 13.8% of the income of employees above £166 a week. For employers, there is no upper limit on NI payment.
if you’re an employee, you have to pay National Insurance as per the table:
Procedure to pay Tax and National Insurance?
You have to pay tax if your income exceeds the annual Personal Allowance. Your employer will pay the tax before paying you the income. Most employers use the PAYE system to pay tax and National Insurance.
If you have paid less tax, you have to pay the remaining amount and if you have paid more, you can receive a refund at the end of the year.
Employers deduct National Insurance on a weekly or monthly basis or whenever you are paid. You can’t claim to refund National Insurance unless there’s a mistake. In this regard, you can visit the government site to claim a refund for National insurance.
Understand PAYE System:
If you have started a new job, the P45 form is required from your last job or you need to fill out the new starter checklist by HMRC that you receive from your employer.
Through the help of these forms, you tell HM Revenue and Custom (HMRC) that you’ve started working and you’ll receive a tax code through this form.
This tax code will help your employer to deduct the tax from your salary. PAYE system can be used to collect your tax from the income received from this job and other income sources.
What is the Tax Code and How to calculate it?
The amount you paid as a tax, depends upon your gross income, the tax you’ve already paid in the current year, and your Personal Allowance.
People are given different tax codes based on various conditions. HMRC will let you know about your tax code and the tax you’ve paid through a coding notice once a year. Tax code is a combination of a few letters and numbers that can also be found on your payslip.
Tax code is the amount you can earn on which you haven’t paid tax. It is divided by 10 with an additional letter.
For example 1250L
It implies that you have earned £12,500 before paying tax.
We hope you have got the answer: How much Tax and National Insurance will I pay?
For further queries, you may contact HM Revenue and Customs helpline.