A Detailed breakdown
Have you ever wondered how your take home pay is calculated? There are many different factors that are used to calculate your take home pay including national insurance, tax code and gross pay. We have created a detailed description of some of the information you may find on your payslip.
This is your full pay before any tax and national insurance deductions are made.
All PAYE employees are entitled to 5.6 weeks paid holiday leave every year. Contractors are given the same entitlement, if they employ the services of an umbrella company, since PAYE is used to pay them also. Every payday, 12.07% of a contractor’s taxable income will be deducted and set aside as holiday pay. It is common for umbrella companies to keep a contractor’s holiday pay on their behalf however, the contractor can choose to have this paid to them each week in their take home pay. This is known as ‘rolling up’ holiday pay.
National Insurance contributions
Every worker who is above the age of 16 and below the state retirement age pays National Insurance contributions every payday. National Insurance is paid in 2 parts: Employee National Insurance (which is paid by the employee) and Employer National Insurance (which is paid by the employer or umbrella company). Employers are responsible for calculating and paying national insurance on behalf of their employees and sending it to HMRC.
Payslips can also contain details about your pension. For example, if you’re signed up to a pension scheme, it will show how much you are contributing.
Take home pay
This is the amount you will take home after the necessary deductions have been made.
A Tax code is a code that HMRC uses to calculate a worker’s income tax rate. Tax code calculations are based on how much a worker’s yearly income falls within each tax band. If an employee has a standard tax code (1185L in 2018/2019), then they are not taxed on £11,850 of their yearly income, while the rest is taxable starting at the minimum tax rate of 20%.
Tax codes can change throughout a tax year (6 April to 5 April the following year) so the change needs to be reflected on your payslips. HMRC lets you know when your tax code changes and when it does, you should let your employer (umbrella company) know so that your taxes can be calculated correctly. Otherwise, you’ll end up either paying too much or too little tax.
Umbrella company fee
All umbrella companies charge a fee for providing payroll services. Each company set their own fees. The rate they charge you is also known as an umbrella company margin.
If you have taken out a student loan, you may find student loan repayment deductions on your payslip. The deductions are based on your repayment plan.