Topic 3:

Documentation for pay and pay

calculations

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Checklist for Topic 3

By the end of this topic, you will be able to:

Define ‘pay as you earn’ (PAYE);

Understand a payslip, including:

- National Insurance (NI);

- income tax and tax codes; and

- personal allowance;

Explain and calculate gross pay, net pay and deductions;

Work out pay, including tax;

Explain sick pay;

Explain the arrangements for repayment of a student loan;

Explain the National Minimum Wage

Explain how tax is calculate for the self-employed (that is self assessment) including:

- what a ‘tax return’ is; and

- what a ‘self assessment’ is; and

Explain the two tax documents – P45 and P60

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EarningsWhat are earnings?

Earnings – the money received for completing a job.

Earnings are called ‘wages’ or ‘salary’

What’s the difference?

• Wages usually refers to an hourly amount.

• Salary usually refers to an annual amount (per annum – p.a.)

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Activity 3aConsider the following people.

a) Ali delivers newspaper for The Corner Shop and

earns £3 an hour. He also gets £5 each week for

pocket money.

b) Bethany babysits for her neighbours and earns £3.40

an hour. She also gets an allowance from her

grandma of £40 each month.

c) Connor works in a sports shop called Jump on

Saturdays and earns £4.85 an hour. He also helps his

father at his shop for an hour each day after college

for £20 a week.

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Activity 3a continuedd) Demi is a receptionist at Dolby and Crane Ltd

earning £18,000 a year. Before that, she was unemployed and received a government benefit that paid her £56.81 per week.

e) Evan is a painter/decorator who works for himself (that is, he is ‘self-employed’). He charges £200 per day. He also works as a DJ at a club on Saturdays and at weddings, for which he charges £100 a time.

Q. Which one is earning a salary?

Demi is earning a salary, because her pay is stated as being ‘£18,000 a year’.

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Gross Pay & Net Pay

Everyone pays part of their earnings to the

Government. These payments are called deductions.

These payment come in the form of:

◦ Tax; and

◦ National Insurance (NI)

Gross Pay – earnings before deductions

Net Pay ( “take home pay” ) – earnings after

deductions.

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Activity 3ba) Jimmy has gross monthly pay of £1,100 and

total deductions of £105.77. How much will be paid into his bank account this month?

Jimmy will have £994.23 paid into his bank account.

• £1,100 - £105.77 = £994.23

b) Lizzie has gross monthly pay of £980. She has to pay income tax of £29.33 and NICs of £38.04. How much is her net pay?

Lizzie’s net pay is:• £980 - £29.33 - £38.04 = £912.63

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Pay as you earn (PAYE)

• PAYE is the way most people pay tax to the Government.

• Employers collect it from their employees gross pay and pass it to the Government.

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Payslips

Employers are required to provide employees with

a payslip.

It is usually marked “Private and Confidential”

It details

◦ Gross Pay

◦ Deductions with reasons

◦ Net Pay

◦ Payment Method

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Activity 3cHow much money will Demi be paid on 1 June 201X?

• On 1 June 201X, Demi will be paid £1,266.23

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National Insurance (NI)

• Employees pay NI as well as tax. It is used to

fund:

- State Pensions;

- Jobseeker’s Allowance, etc.

• The amount paid depends on:

- How much you earn; and

- If you are Employed or Self-Employed

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National Insurance Number

• This is your own personal account number with

the Government.

• Used to record tax and NI contributions.

• Reference for Social Security system

- Claiming benefits

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Who do you think uses your national insurance number?

• You must give your NI number to

- HMRC

- Employer

- Student Loan Company

- Government Benefits Agencies

- Banks

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Calculating NI

• NI is calculated weekly.

• Different “classes” – depends on pay and

employment status

• Most pay

• Class 1 : 12% of earnings between £153 and £805

: 2% of earnings over £805.

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Case Study 1

Karim is employed and earns £12,480 a year. This works

out as £240 a week. He does not have to pay NI on the

first £153 per week.

Calculate Karim’s weekly NI contribution.

So,

£240 - £153= £87

Karim has to pay:

12% x £87 = £10.44 per week.

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Case Study 2

Mark is also employed. He earns £52,000 a year. This works

out at £1,000 per week. He does not have to pay NI on the

first £153.

Calculate Mark’s weekly NI contribution.

So, Mark has to pay 12% on earnings between £153 a

week and £805 per week.

£805 - £153 = £652

12% x £652 = £78.24

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Case Study 2 continued

He also has to pay 2% on earnings between

£805 a week and £1,000 per week.

£1,000- £805 = £195

2% of £195 = £3.90

So Mark has to pay:£78.24 + £3.90 = £82.14 per week

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Did you know?

Part-time workers can sometimes have a

surprise, because they may get a deduction

for NI in a week during which they have done

some extra hours. As a consequence, the

extra bit of work does not pay as much as

they thought.

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Case Study 3Priya has a part-time job of ten hours a week at £8 per hour.

• Does Priya pay NI?

Her usual pay is £80 and so she does not pay NI.

One week she worked full-time to cover for a sick colleague. She worked 35 hours that week.

• Calculate her net pay for this week.

Priya’s gross pay for this week was £280. The pay office deducted £15.24 in NICs and so her net pay was:

£280 - £15.24 = £264.76

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Income Tax and Tax Codes

Earnings are taxable

Tax is paid to Her Majesty’s Revenue and Customs

(HMRC).

Each taxpayer receives a personal allowance

◦ This is the amount they can earn tax-free.

◦ For 2014-15 the basic allowance for adults is £10,000.

◦ Those born between 6 April 1938 and 5 April 1948 are

allowed an allowance of £10,500 and those born before

6 April 1938 are allowed an allowance of £10,660.

Note: income tax is due only on income that is above your tax-

free allowance.

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Case Study 4

Demi earns £18,000 a year. Her personal allowance is £10,000.

• What is her taxable pay?

Demi’s taxable pay is:

£18,000 - £10,000 = £8,000.

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Activity 3d

a) Alfie’s personal allowance is £10,000 and he earns £54,000. What is his taxable pay?

£54,000 - £10,000 = £44,000.

b) Julia’s personal allowance is £10,500 (she was born on 2 February 1942) and her income is £13,000. What is her taxable pay?

£13,000 - £10,500 = £2,500

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Tax Rate & Tax BandThe actual tax paid is worked out as a percentage of taxable pay. The government calls this a ‘tax band’:

• for taxable income below £31,865 (in 2014/15), the rate of tax is 20% – which is the basic rate band.

• for taxable income between £31,866 and £150,000, the rate of tax is 40% - which is the higher rate band; and

• for taxable income above £150,000, the rate of tax is 45% - which is the additional rate band.

Note:- You do not pay tax at the highest rate for all of your income – only for that part of your income which is in the higher bands.

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Case Study 5

Demi earns £18,000 and we worked out above that her taxable pay is £8,000.

This is all in the basic rate band and so she will pay all of her tax at 20%.

• Calculate her tax payable for the year?

Demi’s tax for the year is:

20% x £8,000 = £1,600.

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Case Study 5 continued

How much tax will she pay each month?

Because she is paid monthly, her employer takes from her monthly pay under the PAYE scheme:

£1,600 ÷ 12 = £133.33

If you look at Demi’s pay slip, you will see that this is the amount of tax that has been deducted.

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Case Study 6

Alfie earns £54,000 and we worked out above that his taxable pay is:

£54,000 - £10,000 = £44,000

This income means that Alfie pays tax in both the basic rate band and the higher rate band.

• Calculate his tax payable each month.

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Case Study 6 continued

He pays tax at the basic rate on the first

£31,865 of his taxable income and he

pays tax at a higher rate on the rest –

that is:

£44,000 - £31,865 = £12,135.

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Case Study 6 continued

We can set the calculation out as follows.

So, Alfie has paid tax at 40% on the taxable

pay that is above £32,010. His tax paid each

month is:

£11,227 ÷ 12 = £935.58

Band Rat

e

Pay in the band Tax

calculation

Amount of

tax

Basic rate 20% £31,865 £31,865 x

20%

£6,373

Higher rate 40% £44,000 -£31,865 £12,135 x

40%

£4,854

Total tax £11,227

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Did you know?

Tax calculations are always

rounded down so that no one

pays more tax than they have to.

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Activity 3eWork out the monthly tax for the following people.

a) Jamie earns £24,000 and has a personal allowance of £10,000.

Jamie’s tax is worked out as follows:• £24,000 - £10,000 = £14,000• £14,000 x 20% = £2,800• £2,800 12 = £233.33 monthly tax

b) Becky earns £7,670 and has a personal allowance of £10,000.

Becky doesn’t pay any tax because her income is less than the personal allowance.

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Activity 3e continuedWork out the monthly tax for the following people.

c) Hiten earns £76,800 and has a personal allowance of £10,000.

Hiten’s tax is worked out as follows:• £76,800 - £10,000 = £66,800• £66,800 - £31,865 = £34,935• £31,865 x 20% = £6,373• £34,935 x 40% = £13,974• £6,373 + £13,974 = £20,347• £20,347 12 = £1,695.58 monthly tax

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Tax Codes

Employers use a Tax Code to calculate the amount of tax to deduct from pay.

The tax code is made up of several numbers and letters – for example, ‘1000L’ or ‘717L’.

The ‘L’ at the end tells the employer that the code includes the personal allowance.

◦ Demi’s tax code is ‘1000L’ because she has a personal allowance of £10,000.

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Tax Codes

When the tax code numbers are multiplied by 10, this tells the employer how much pay is tax-free and so the employer can work out the taxable pay.

HMRC use tax codes to collect tax that may have been underpaid.

◦Tax codes are adjusted to collect unpaid tax the next year.

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Activity 3f

Karim, who works in a gym, has a tax code of 803L. He earns £12,480 in a yea.

Karim owes some tax because he had a second job last year as a casual DJ and did not pay tax on his earnings. The government found out about it and told him that he owed extra tax. The tax code has reduced the income that he can earn without paying tax. This means that he is now going to pay back the tax that he owes.

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Activity 3fa) Work out Karim’s monthly gross pay.

Karim earns £12,480 a year, so his monthly gross pay is:

£12,480 ÷ 12 = £1,040

b) Work out his taxable pay

A tax code of 803L means that Karim’s monthly allowance is £8,030 a year. So his taxable pay is:

£12,480 - £8,030 = £4,450

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Activity 3fc) Work out his monthly tax.

£4,450 is all in the standard rate band, so his tax is:

20% x £4,450 = £890

So, the deduction for tax each month is:

£890 ÷ 12 = £74.16

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Activity 3fd) Work out his pay after tax has been deducted (that is, his net pay). Calculate this monthly.

Gross Pay £1,040

Deductions £74.16

Net Pay £965.84

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Activity 3gIn each case, work out the:• Monthly gross pay;• Taxable pay;• Monthly tax; and• Net monthly pay

a) Jenny has a tax code of 845L and earns £34,000 per annum.

b) Aisha has a tax code of 786L and earns £25,000 per annum.

c) Cassandra has a tax code of 680L and earns £78,000 per annum. (Remember to use the higher rate band for Cassandra).

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Activity 3g continued.a) Jenny has a tax code of 845L and earn

£34,000.

• Monthly Gross Pay: £34,00012 = £2,833.33

• Taxable Pay: £34,000 - £8,450 = £25,550

• Monthly Tax: £25,550 x 0.20 = £5,110 £5,110 12 = £425.83

• Net Monthly Pay: £2,833.33 - £425.83 = £2,407.50

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Activity 3g continued.(b)Aisha has a tax code of 786L and earns

£25,000.

• Monthly Gross Pay: £25,00012 = £2,083.33

• Taxable Pay: £25,000 - £7,860 = £17,140

• Monthly Tax: £17,140 x 0.20 = £3,428 £3,428 12 = £285.66

• Net Monthly Pay: £2,083.33 - £285.66 = £1,797.67

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Activity 3g continued.(c) Cassandra has a tax code of 680L and earns £78,000. (Remember to use the higher rate band for Cassandra).

• Monthly Gross Pay: £78,00012 = £6,500

• Taxable Pay: £78,000 - £6,800 = £71,200

• Monthly Tax: £71,200 - £31,865 = £39,335 £31,865 x 0.20 = £6,373 £39,335 x 0.40 = £15,734 £6,373 + £15,734 = £22,107

£22,107 12 = £1,842.25

• Net Monthly Pay: £6,500 - £1,842.25 = £4,657.75

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Overtime

The amount of time that someone works beyond normal working hours.

Payment for overtime can be at a higher rate.

For example,• ‘time and a half’ (rate x 1.5)• ‘time and a quarter’ (rate x 1.25)• ‘double time’ (rate x 2)

Note: some businesses will pay double if you work on a bank holiday.

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Sick PayIf you are ill and cannot work, your employer may not pay you.

The government will pay your sick pay, which is actually paid by your employer on behalf of the government. This is called Statutory Sick Pay (SSP).

The basic principles are that SSP will be paid if you earn:• are sick for at least 4 days in a row• are earning at least £111 a week; and• have told your employer that you are sick.

Note: o You may also need to provide medical evidence from the

8th day.o Your employer will pay SSP at the current rate of £87.55

each week.

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Did you know?

For many employees, their

contract of employment gives

them better payments than SSP.

For example, teachers who have

worked for more than 3 years are

paid on full pay for 100 days of

illness.

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Student LoansPart of the financial support package that the government provides for students is student loans.

People who take out this type of loan for college or university only start making repayment to the government when they begin to earn more than £21,000 a year.

Their employer takes the repayments out of their wage.

The amount of the repayment depends on how much more than £21,000 the employee earns. Student loan repayments are made at 9% of these extra earnings.

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Case Study 7

Sanjay earns £22,000 a year – that is £1,000 more than £21,000.

Student loan repayments are made at 9 per cent of these extra earnings.

Sanjay makes repayments each year of:

9% x £1,000 = £90

Note: There is no set length of time over which to repay this type of student loan.

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Activity 3hMia earns £26,000 per annum. How much will her student loan repayments be?

£26,000 - £21,000 = £5,000

£5,000 x 0.09 = £450

So, Mia’s student loan repayments will be £450 per year.

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National Minimum Wage

• By law employers must pay works a

minimum amount of money per hour. This

amount of money is what is known as the

‘National Minimum Wage’.

• The government introduced the concept of a

minimum wage to make sure that employees

were not forced to work for a low and unfair

rate of pay.

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National Minimum Wage

The ‘National Minimum Wage’ applies to all

employees in the UK ages 16 and over. It

varies according to how old the employee is,

as follows:Age Minimum per hour until 30 September

2014

Minimum per hour from 1

October 2014

16-17 £3.72 £3.83

18-20 £5.03 £5.18

21 and over £6.31 £6.50

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Activity 3i

a) What is the minimum wage that Connor

(who is 17) must be paid?

The minimum wage for Connor is £3.83.

b) What is the minimum wage that Demi (who

is 19) must be paid?

The minimum wage for Demi is £5.18.

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Activity 3j

Kit works at

Arnold and

Walsh, a firm of

solicitors. He

earns £23,000

per year. Kit is

repaying a

student loan.

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Activity 3j continued

a) How much money will Kit get on 1 June

201X?

Kit will get £1,523.15 on 1 June 201X.

b) How much is his student loan repayment

for the month.

Kit’s student loan repayment for the month is

£15.

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Tax and NI paid to date

Payslips also tell employees the total amount of

◦ Taxable pay earned in the year, so far.

◦ Tax and NI paid in the year, so far.

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P45 and P60P45 and P60 are two common tax documents that must, by law, be given to you.

P45 – used when you stop working for an employer.◦ Record of taxable income and Tax and NI paid so

far.◦ Give it to a new employer to continue tax

payments.

P60 – summary of your pay and deductions for the year.◦ Given at the end of every tax year.

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Self EmploymentIncome tax and NI

Self-employed people do not know how much they will earn in a year until the year is ended.

So, self-employed people cannot pay income tax as they earn, using PAYE. Instead, they fill in a tax return at the end of the tax year, and calculate how much tax and NI they owe. They then pay the tax and NI to HMRC.

This method is called ‘self-assessment’.

Q. If Evan makes a mistake and pays too little income tax, what do you think HMRC will do?

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Self EmploymentTax return (self-assessment)

Self assessment involves completing an online or paper tax return in order to tell HMRC about your income.

HMRC uses the figures on the tax return to work out your tax bill, or you can work it out yourself.

People need to complete a self-assessment form if they have more complicated tax affairs, or have earnings that are not taxed through PAYE. This might include a person who has two jobs, the total earnings from which to put them in the higher rate tax band.

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Case Study 8BASIC WAGE CALCULATIONS

Dan is working for a company making car parts. He is paid £10 an hour and works a 40-hour week.

His weekly pay is: 40 x £10 = £400

The company is busy and his supervisor asks Dan to work some extra hours. Dan’s company pays overtime at one-and-a-half times his normal pay. So his overtime hourly rate is:

1.5 x £10 = £15

Dan does 6 hours overtime and so will earn an additional:

6 x £15 = £90

Dan’s total pay for the week is:

£400 + £90 = £490

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Activity 3k

a) Zack works a 40-hour week in a shop. He is paid

£6 an hour. He does an extra eight hours

overtime at time and a half. What is his pay for

the week?

• Basic pay for the week is: £6 x 40 = £240

• Overtime is at £9 an hour: £6 x 1.5 = £9

• Zack did 8 hours overtime: £9 x 8 = £72

• Zack’s pay for the week is: £240 + £72 = £312

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Activity 3k

b) Karim works a 40-hour week in a gym. He is paid

£6 an hour. He does an extra four hours overtime

at time and a quarter. What is his pay for the

week?

• Basic pay for the week is: £6 x 40 = £240

• Overtime is at £7.50 an hour: £6 x 1.25 = £7.50

• Karim did 4 hours overtime: £7.50 x 4 = £30

• Karim’s pay for the week is: £240 + £30 = £270

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Activity 3k

c) Nicky works a 40-hour week in a boutique. She is

paid £5.50 an hour. She also works seven hours on

a bank holiday and gets double time. What is her

pay for the week?

• Basic pay for the week is: £5.50 x 40 = £220

• Overtime is at £7.50 an hour: £5.50 x 2 = £11

• Nicky did 7 hours overtime: £11 x 7 = £77

• Nicky’s pay for the week is: £220 + £77 = £297