Employee’s Pay

Chapter 21

PayEmployees are paid either a salary or a wage.

If the employee gets paid based on the number of hours they have worked, this is called a wage.

If the employee receives a set amount of money every year, and is given in 12 installments (every month)

Tax

Give me your

money!

Every employee pays tax on their wages. In the UK it is called Pay As You Earn (PAYE).

Other deductions are also taken from the employee’s wage / salary such as National Insurance

Therefore distinction is made between:•Gross pay (total wage / salary before any deductions)•Net pay (the wage / salary after deductions)

TaxIn an attempt to maximise revenue for the government and to equally spread the country’s wealth, tax is calculated by the following:

I earn £45,000 / yearHow much tax do I pay?

Allowances:•0 - £7,475 tax free• £7,476 - £25,000 = 10%•£25,001 - £38,000 = 20%•£38,001 - £100,000 = 45%•100,001 + = 65%

This amount is tax free

This amount (25,000 – 7,475 = 17,525 is charged at 10% (1,752.5)

This amount (38,000 – 25,000) = 13,000 is charged at 20% (2,600)

This amount (45,000 – 38,000) = 7,000 is charged at 45% (3,150)

£7502.5

Work out how much Tax each person pays

0 - ฿150,000 = tax free฿150,000 - ฿500,000 = 10%฿ 500,000 - ฿1,000,000 = 20%฿1,000,000 - ฿4,000,000 = 30%฿4,000,000 + = 37%

Additional allowances:•Dependants

•Unemployed husband / wife - ฿30,000•Parents - ฿30,000•Children - ฿15,000 (maximum 3 children)

Name: JamesGross earnings: ฿1,020,000Dependents: wife / 1 childHow much tax do I pay?

This amount is tax free (up to 195,000)

This amount (500,000 – 195,000 = 305,000 is charged at 10% (30,500)

This amount (1,000,000 - 500,000 = 500,000) is charged at 20% (100,000)

฿136,500

This amount (1,020,000 – 1,000,000 = 20,000) is charged at 30% (6,000)

Name: JohnGross earnings: ฿6,000,000Dependents: wife / 4 childrenHow much tax do I pay?

This amount is tax free (up to 225,000)

This amount (500,000 – 225,000 = 275,000 is charged at 10% (27,500)

This amount (1,000,000 = 500,000 = 500,000) is charged at 20% (100,000)

฿1,767,500

This amount (4,000,000 – 1,000,000 = 3,000,000) is charged at 30% (900,000)

This amount (6,000,000 – 4,000,000 = 2,000,000) is charged at 37% (740,000)

Name: JaneGross earnings: ฿1,500,000Dependents: ParentsHow much tax do I pay?

Name: Mf FletcherGross earnings: ฿1,020,000Dependents: 0How much tax do I pay?

Therefore two people may receive the same gross pay, however have different allowances and end up with different net pay.

In many countries, national insurance must be paid, and in return the citizen receives:•Incapacity benefit•Jobseeker’s allowance•Maternity allowance•Retirement allowance•Widow (general / mother / pension)•State pension

Deductions thus far:•PAYE•National Insurance•Additional pension contributions•Voluntary contributions (such as donation to charities)

Additional payments:Statutory sick payStatutory Maternity /Paternity pay

This is usually a fixed amount and is paid equally by everyone

Recording payment of wages and salaries

Bank 2,000

Wages

Bank HM Revenue & Customs

Wage 2,000

Wage a/c is debited with net amount paid to employees. Bank a/c is credited

HM Rev & Cust 600

Wages 600

Wages a/c debited with the total amount of income tax to be paid for all employees

Bank 600

HM Rev & Cust 600

Money is paid out of the bank to HM Revenue & CustomsProfit & Loss 2,600

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