Understanding your income•
Getting your head around the world of money can be tough. But, once you’ve got the fundamentals down, everything gets that bit easier.
In this blog, we want to help you understand your income. That may sound simple at first, but when you start throwing in tax brackets, payslips and pension contributions, things get a bit more complex. But don’t fret – we’re here to help.
What is income?
This bit’s easy enough. Income refers to money earned. Usually, this’ll be from a job, but can also refer to earnings from investments, side hustles and so on.
Understanding your payslip
If you’re in full-time employment, you’ll likely get a monthly payslip with a load of detail about your income. But, be honest, do you ever take the time to review it? No judgement here! Not many do. That’s why we’ve summarised the most important things included:
Gross income: This is the total amount of money you earned before anything – like tax or pension contributions – is taken off. To be clear, (sadly) this is not the amount of money that’s going to land in your bank each month.
Net income: This is what you end up with after all your monthly deductions, which we’ll get into now…
Tax and National Insurance: Two of the biggest deductions for most of us are income tax and National Insurance contributions. Your payslip will show how much you’re paying each month, which will be based on your tax code and earnings. You might not be paying anything at all – we’ll get into why later in the blog.
Tax code: Your payslip will show what your tax code is, which plays a part in determining how much tax you pay. Again, we’ll go a bit deeper on tax codes later in the blog.
National Insurance number: If you’re ever in need of your National Insurance number, you should be able to find it on your payslip. This unique identifying number is used to track your tax and insurance contributions. Most people born in the UK are assigned a National Insurance number automatically around age 16. But if you don’t have one, you can apply for one.
Pension contributions: If you’re paying into a pension, you’ll be able to track how much you’re contributing each month on your payslip. If your employer is also paying into your pension, you should be able to see that too.
Other deductions, additions and more: If you’re paying off a student loan or receiving childcare vouchers the amounts should be covered on your payslip. You may also be able to find your employer’s details, the payment period covered, your earnings so far that year and more.
In short, there’s a lot of info there. But keeping track of your payslip month to month can help you stay on top of your finances and spot anything – such as if you’re overpaying on tax or being underpaid by work – quickly.
If you’re self-employed, you won’t get a payslip in the same way. This is because it’s up to you to organise your tax payments and other deductions.
Turning to tax
Tax is a tangly topic, and by no means are we going to be able to cover everything in full here. But we can give you a better grounding by getting into some of the need-to-knows.
Tax is money taken off your earnings and given to the government to help pay for public services. Think the NHS, education, important stuff like that.
How do I pay it?
If you’re in full-time employment, your employer should be doing this for you through the Pay As You Earn (PAYE) system. That means you don’t need to actively do anything.
If you’re self-employed, you’ll need to register and then do a self-assessment tax return. A lot goes into a return. But, in short, it’s a way of declaring your earnings for the year. HMRC then works out from that how much tax you owe.
For much, much more detail on self-assessment tax returns, head here.
How much do I have to pay?
This is where things start getting a little complex. The short answer is… it depends. But that’s not very helpful. So, let’s go a little deeper.
Each year there’s a certain amount most of us can earn completely tax-free. This is called the ‘personal allowance’ and is currently set at £12,750. That means if you earn £12,750 a year or below, you won’t need to pay any tax. But, if you’re lucky enough to earn over £100,000 a year, your personal allowance starts decreasing until the point where, if you earn over £125,140 you don’t get a personal allowance at all.
Outside of the personal allowance, the amount of tax you pay depends on how much you earn. Again, there’s a lot of complexity here.. But, basically, the more you earn, the more you’re taxed. Here are the income tax rates at the time of writing:
Just to be clear, this doesn’t mean that if you earn £55,000 a year, everything you earn is taxed at 40%. You’ll still have your earnings up to £12,750 taxed at 0%, then 20% tax is applied to the next £37,699 of earnings, with the 40% rate only coming into effect for the £4,729 that’s taken you above the £50,271 threshold.
|Up to £12,570||0%|
|£12,571 to £50,270||20%|
|£50,271 to £125,140||40%|
Your tax code – which you now know where to find (if you zoned out earlier, it’s on your payslip) – helps employers work out how much tax you should pay.
If you have one employer and earn under £100,000, the standard tax code is 1257L. But this can be adjusted up or down for lots of reasons, such as if you receive any extra benefits from your employer that you need to pay tax on, if you paid too much or too little tax previously, and so on. If you live in Scotland, you'll also have an S at the start (for example, S1257L) or a C if you live in Wales (C1257L).
The numbers in the standard tax codes relate to how much tax free allowance you’ll receive, so 1257L or S1257L means you receive £12570 in tax free allowance. Or as a further example, 1093L would mean you only have a tax free allowance of £10,930 as you underpaid tax previously. The basic rule of thumb is to add a 0 to your tax code to work out your tax free allowance.
There are lots of other tax codes which apply for more complicated personal circumstances, like if you’re claiming the Marriage allowance or have 2 or more jobs. These look a bit different, for example BR means that all your income is taxed at 20% whereas D0 means it’s all taxed at 40%.
If you’re on the wrong code, you could end up paying the wrong amount of tax. If you pay too much, you should get a rebate. But if you underpay, you may be asked to make up the difference later.
To find out much more about tax codes head here.
Interested in finding out more? Sign up for one of The Money Charity's free and interactive virtual workshops by emailing firstname.lastname@example.org for a deeper dive on managing your personal finance.
The lowdown on student finance
In this special guest blog, Stephanie Fitzgerald from The Money Charity gives the lowdown on student loans.
How to start saving
The sooner you start to save, the more you benefit, growing your stash, and earning more in interest.