Understanding PAYE Contributions

If you are starting a new job or entering the work force one of things you should be aware of are taxes. Taxes will always be a constant in your life and the more informed you are about them, the less likely you will have any problems in the future. In the UK, taxes are deducted directly from your pay either at the end of each month or each week. This tax collection method is called Pay As You Earn or known by its acronym PAYE.

It should be noted that the taxes you pay go to the government to fund its operations and policies such as health, transport, education, etc The tax is collected and managed by HM Revenue and Customs referred to as HMRC. Not only do they collect and manage your taxes, they are also responsible for allocating your tax code. Your tax code is usually viewable on your pay slip. Your tax code represents the amount of taxes and your classification. This should be three numbers followed by a letter, 525L, income you can receive times 10 before paying tax. For instance, 525 times 10 equals £5,250. Once you earn more than this amount you will begin to pay tax on it.

It should be noted that the amount of tax allowance (the amount that is not taxed) is usually about £5,000 per year, if you make more the tax rates are similar to the ones below;
Any income that ranges from £5,001 to £7,000 will usually be taxed at 10%. The next £32,000 will be taxed at 22% and usually any amount over this will be taxed at 40%.

Besides taxes, other contributions are taken out of your pay check. This includes National Insurance contributions or (NI). NI usually consists of your state pension and other types of social security benefits. Again, the amount of NI contributions taken out will depend upon your income. However the current rate is 11% for most employees. It should be noted that NI must be removed by your employer by law. You can not receive cash in hand and then pay NI yourself. For an exact figure on how much NI should be deducted each pay period for your individual situation, consult with the many NI calculators online.
Make Sure Your Tax Code is Correct

If your tax code is incorrect, you can be paying either more taxes than you owe or not enough- in effect owing money to HMRC. You can confirm your tax code by looking at your pay slip or P45 form. It should be noted that if you just started working at a company, many times this is when tax code mistakes can occur. For instance:
When you start working at a new company, you may have

* Been given an emergency tax code
* Your employer might have miscalculated and given you an incorrect tax code
* Your tax code was based on a full year’s income, however you only worked for part of the year
* You have more than one source of income
* You retired or became self employed

All of these factors can affect your tax code and can be the catalyst for a mistake. If you have changed your status or have experienced any of the above situations, you should confirm your tax code immediately.

Once again, you can view your tax code either on Form P45, receive it in the mail every year (usually during January or February) or by contacting your local tax office.

If you have over paid in taxes, you are entitled for a refund. Contact your local tax office and explain the situation. You will likely need to submit evidence such as pay slips, etc. You should note that you can make a claim for overpayment up to six years before the date of the claim. In most cases, HMRC will send out your tax refund in a short period of time, however if they are lagging, they may need a gentle nudge.

For those that owe taxes, you will need to pay a lump sum or negotiate a repayment plan with HMRC. The payment plan will usually be constructed via a number of factors such as the amount owed, your financial situation, the circumstances of the mistake, etc.
Other Benefits that May be Taxed (Benefits in Kind- BIK)

BIK- Benefits in Kind are taxed as well and must be taken out each pay period. They can include; cash bonuses, company cars, low interest loans, medical insurance, subsidized living accommodations, etc. It should be noted that there are other benefits that are not taxed; they include subsidized meals and drinks, mobile phones, parking, childcare, etc.

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