# Deductions from wages or salaries

## Income tax

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

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.

Gross pay - the total wage or salary before deductions have been made.
Net pay - the total wage or salary after deductions have been made. This is also referred to as 'take home pay'.

## 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 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