Deductions from wages or salaries

Income tax

When workers earn more than a certain amount (called the tax threshold), they have to pay income tax.

For example, during the tax year from April \({2014}\) to April \({2015}\), an individual would have to pay income tax on any income over \(\pounds{10,000}\).

The first \(\pounds{10,000}\) is called a tax allowance, and a person is usually allowed to earn this amount without having to pay any income tax on it.

Of the income that is to be taxed, the first \(\pounds{32,000}\) (approximately) is taxed at \({20}\%\), and any income over this amount is taxed at a higher rate.

Question

Helen has an annual salary of \(\pounds{36,000}\) for the tax year \(2014 - 2015\).

She has a tax allowance of \(\pounds{10,000}\).

Calculate how much income tax she will have to pay during the year.

Helen has a tax allowance of \(\pounds{10,000}\), so she will only have to pay income tax on \(\pounds{26,000}\).

Her income is under \(\pounds{32,000}\) therefore income tax is charged at the rate of \({20}\%\).

\({20}\%\) of \(\pounds{26,000}\) \(={0.2}\times{26,000}\)

\[=\pounds{5,200}\]

Helen will have to pay \(\pounds{5,200}\) as income tax.

curriculum-key-fact
Gross pay - the total wage or salary before deductions have been made.
curriculum-key-fact
Net pay - the total wage or salary after deductions have been made. This is also referred to as 'take home pay'.
Income (Gross pay), and types of deductions (Tax, National Insurance), highlighted on a payslip

National Insurance (NI) contributions

This is an amount taken from wages and salaries to contribute towards benefits such as your state pension.

For the year \(2014 - 2015\), the rate of National Insurance contributions is \({12}\%\) on earnings between \(\pounds{153}\) and \(\pounds{805}\) a week, or between \(\pounds{7,956}\) and \(\pounds{41,865}\) per year. If you earn below \(\pounds{153}\) a week, you do not have to make any National Insurance contributions. If you earn more than \(\pounds{805}\) a week, then you also have to pay \({2}\%\) on any further earnings.

  • Earnings under \(\pounds{153}\) a week: \({0}\%\) goes towards National Insurance contributions
  • Earnings between \(\pounds{153}\) and \(\pounds{805}\) a week: \({12}\%\) goes towards National Insurance contributions
  • Earnings over \(\pounds{805}\) a week: a further \({2}\%\) goes towards National Insurance contributions
Question

Dayna works as an actress. Her weekly wage is \(\pounds{1,200}\).

How much National Insurance does Dayna have to pay each week?

  • Dayna's total weekly wage is \(\pounds{1,200}\).
  • Dayna does not need to pay National Insurance on the first \(\pounds{153}\) that she earns.
  • She will pay \({12}\%\) National Insurance on her earnings between \(\pounds{153}\) and \(\pounds{805}\) (which is \(\pounds{805}-\pounds{153}=\pounds{652}\)).
  • For the remaining \(\pounds{395}\) that Dayna earns, she'll pay \({2}\%\) National Insurance

In summary:

\(\pounds{153}\) at \({0}\%\)

\(\pounds{805}-\pounds{153}=\pounds{652}\) at \({12}\%\)

\(\pounds{1,200}-\pounds{805}=\pounds{395}\) at \({2}\%\)

Total National Insurance paid \(={12}\%\) of \(\pounds{652}\) \(+~{2}\%\) of \(\pounds{395}\)

\[=({0.12}\times{652})+({0.02}\times{395})\]

\[={78.24}+{7.90}\]

\(=\pounds{86.14}\) per week