Payslips – and how to interpret them
As another year starts, it makes sense to take a look at one of the most important papers we receive on a regular basis – our payslip. Most of us tend to only look at the bottom line, but there’s a lot more to scrutinise than how much we are or aren’t being paid.
Most of us will get a payslip, although did you know that not everyone has the right to get one, freelancers, people in the police service and merchant seaman are not legally entitled to get one – even if most probably do).
The rest of us are legally entitled to get an itemised payslip. This should show earnings before and after any deductions, explain any deductions and illustrate how the wage is paid.
Running payment totals
Payslips will usually also include salary, tax and National Insurance contributions paid from previous employers, if you have changed jobs within the same financial year. It should also include some, but not all, of your bank account number and sort code (if this is how you are paid). Certain digits should be obscured to protect your account from thieves – if this isn’t the case speak to your pay-roll office.
Depending on your employment contract, you should also be provided with a breakdown of additional payments, such as tips, bonuses or overtime. These will also be subject to tax and NI contributions.
Employers can’t deduct money from your salary apart from legal deductions like tax and National Insurance unless these are stipulated in your contract or you’ve agreed in writing to other deductions.
Many employers offer perks such as travel card loans, childcare vouchers, cycle to work schemes and the chance to make charitable donations straight out of your pay packet through the Give As You Earn (GAYE) scheme.
If you have signed up to any of these check the right amount is being deducted from your gross (before deductions are made) or net (after deductions) pay – GAYE, for instance, is taken out of your gross pay, while the tax-free allowance part of your childcare vouchers (up to £243 a month) comes out of your gross pay, with any surplus coming from net pay.
If you pay into a workplace pension this will be reflected in your payslip, it will include your monthly contribution and the running total since you started work at your current employer.
Are you paying the right tax?
You will pay income tax at the basic rate of 20% if you earn between £9,440 and £32,010. Earnings above this and up to £150,000 are taxed at 40%, while those above this are taxed at 45%.
You might be put on a temporary tax code if you have just started work or gone self-employed, as HMRC may not be able to establish what you are likely to earn over the year. If you are put on a code that starts with three digits, this reflects your tax code – for example, a code 944L reflects the £9,440 tax allowance. If you work on a contract basis you could be put on an emergency code, such as OT.
If you feel you are paying too much tax, contact the tax office and ask them to re-evaluate your code. Have all your payslips to hand when you call.
Paying National Insurance
National Insurance contributions are made by workers aged 16 or over, who are either employees earning above £149 a week or self-employed and making a profit of more than £5,725 a year (unless you get an exception, perhaps because you are earning below £5,725).
Your contributions are used to build up your entitlement to certain benefits, including the State Pension, so it’s important to check that your NI code is correct.
Most of us have to pay National Insurance contributions at a rate of 12% on earnings of between £149 and £770 a week, and 2% of any earnings above this figure.
If you are self-employed you’ll pay a flat rate of £2.70 a week in Class 2 NI contributions (as opposed to Class 1, which is paid by employees aged up to state retirement age). You are also liable for Class 4 NI contributions which are paid annually and calculated as a percentage of your annual taxable profits.
Check out HMRC’s website for more information.
All information accurate at time of publication
This article is provided by the Money Advice Service.