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PAYE Tax and Employee’s NICs – The Basics

A basic introduction to PAYE Tax and Employee’s National Insurance Contributions…

 

What is PAYE Tax?

  • Pay As You Earn Tax is income tax deducted from an employee’s gross salary.
  • The employer then pays this to HMRC on behalf of the employee each month or quarter.
  • The idea behind it is that employees are paying their taxes throughout the tax year, rather than needing to pay a lump sum at the end of the year as Self Employed individuals do.

 

What are Employee National Insurance Contributions?

  • Employee NICs are also deducted from an employee’s gross salary.
  • They are contributions towards state benefits such as state pension (basic and additional), maternity or paternity pay, and jobseeker’s allowance.

 

Do these apply to me?

  • For PAYE Tax – if you are paying yourself a salary (including bonuses and commission) of more than £10,000 per year (£833 per month) for the year April 2014– April 2015, then yes.
  • For Employee NICs – if you are paying yourself a salary of more than £7,956 per year (£663 per month) for the year April 2014 – April 2015, then yes.
  • Note that they are both calculated on total gross salary.
  • For Directors of Limited Companies also taking dividends – these may be subject to income tax if your total gross income (including gross dividend) makes you a higher rate tax payer (see below).
  • You can check if this applies to you using the Contractor Dividend Tax Calculator
  • Dividends are not subject to National Insurance Contributions.

 

What is the current rate of PAYE Tax and how is it calculated?

  • The current rate of PAYE Tax for basic rate earners is is 20%.
  • So if your salary is £12,000 per year you will pay 20% PAYE tax on £2,000 (£12,000 – £10,000 allowance) = PAYE tax of £400.
  • Now for the higher rate of 40% which is where most people get totally confused.
  •  You have a tax free allowance of £10,000, followed by £31,865 of gross earnings which is taxable at the basic rate of 20%. So we are now at total gross earnings of £41,865  and we have paid tax at 20% on £31,865 of that total. (Total tax paid at this point is 6,373).
  • Gross earnings from this point (£41,866 total, or £31,866 taxable earnings) are taxed at 40% up to the next limit of £150,000 taxable earnings (£160,000 total gross earnings). So if you were lucky enough to have a salary of £160,000 you would pay total PAYE tax of £53,626.60.
  • That’s the £6,373 from above at 20% then 40% on the taxable earnings between £31,866 and £150,000 (£118,134) which is £47,253.60.
  • The final rate of PAYE tax is the additional rate of 45%. And this applies to taxable earnings of £150,001 and over (total gross earnings of over £160,001).
  • If you need help calculating your likely tax liabilities you can use an online calculator. http://iknowtax.com/2012/  or http://iknowtax.com/2013/ for simple ones or http://www.uktaxcalculators.co.uk/ for a more detailed one.

 

What is the current rate of Employee NICs and how are they calculated?

  • The current rate of Employee NIC (also known as Class 1) is 12% for most people.
  • This 12% rate is for earnings over £7,956 per year but less than £41,865 in the current year.
  • Earnings over £41,865 are subject to Employee NICs at 2%.

 

How are PAYE Tax and Employee NICs paid to HMRC?

  • PAYE Tax and Employee NICs are paid to HMRC either online via the Billpay system or by cheque using payslips which you will be sent when you register as an employer.
  • It is normal to pay PAYE Tax and Employee NICs monthly.
  • However, if you are likely to owe total NICs and PAYE taxes of under £1,500 per month you can elect to pay HMRC quarterly.
  • The payments must reach HMRC by the 22nd of the month following the end of the tax month or quarter to which it relates.

 

Do I need an accountant or posh software to work this out myself?

  • No, you can do this yourself if you wish.
  • If you have fewer than 10 employees you can use the HMRC PAYE tools software which is a free download from the HMRC website.
  • More information on HMRC PAYE tools and downloads are available here.
  • However, if you would rather have somebody calculate payroll for you then feel free to contact me regarding the payroll services I offer as part of accountancy packages.
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Comments (2)

  1. Hi,
    Thanks for this clear & concise information, very informative for me as foreign national.

    Are abovementioned values current (2014), seeing the post was written in 2013?
    In any case it might add value to mention the year for which the amounts are valid.

    Thanks & regards,
    Bart

    Reply
    • Hi Bart,
      Thank you for your feedback.
      The values have been updated for 2014-15 (the year is specified in the article already).
      Myriam

      Reply

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