For an employee, it is important to understand the tax structure, as an imprecise understanding of the structure can lead to the usage of wrong tax code and incorrect tax payment. Each employee pays income tax and National Insurance (NI) on the wages through the pay-as-you-earn system (PAYE) system. At the same time, it is not viable to expect owner managed businesses to have an exhaustive knowledge of the tax structure and National Insurance rules. DNS Accountants, with years of experience, can help businesses with their tax planning and computation of tax and NI contributions.

HOW MUCH TAX AND NI WILL I PAY

Self-employed individuals pay income tax on business profits and after a self assessment tax return is filed, tax is due on profits generated during the prior 12-month accounting period. The self assessment tax return must be completed each year. Individuals must also pay Class 2 NICs and Class 4 NICs. For 2016-2017, Class 2 NICs works upto a flat-rate of £2.80 per week which is collected by means of self assessment. Class 4 NICs are linked to profits and for 2016-2017, the lower and upper limits are is £8,060, and £43,000 respectively.

TAX BRACKETS

Tax Rate*

Tax year 2015 – 2016

Tax year 2016 – 2017

Basic tax rate (20%)

£0 to £31,785

£0 to £32,000

Higher tax rate (40%)

£31,786 to £150,000

£32,001 to £150,000

Additional tax rate (45%)

£150,001+

£150,001+

*These rates are applied after the tax free allowance has been deducted from the gross wage

CHANGE IN TAKE HOME PAY AFTER TAX AND NATIONAL INSURANCE

Gross Wage

Net 2016/17

£10,000

£9,767

£20,000

£16,767

£30,000

£23,567

£40,000

£30,367

£50,000

£36,466

£75,000

£50,966

£100,000

£65,466

£125,000

£75,566

£150,000

£90,066

The National Insurance pay depends on the employment status and the amount an individual earns. Individuals will end up paying less if she is a married woman or widow along with a legitimate “certificate of election”; or he / she is rescheduling NI because of multiple jobs. For 2016-2017, the Class 1 NIC rates are as follows:

Individual’s pay

Class 1 NI rate

£155 – £827 for a week (£672 – £3,583 per month)

12%

Greater than £827 per week (£3,583 per month)

2%

WHAT IS A TAX CODE?

The tax payable depends on an individual’s income and the amount of tax paid during the year. Tax codes depend on an individual’s circumstance and vary from people to people. Each year the HMRC sends a notice with information regarding tax code and the amount of tax paid. Tax code can also be found on the pay-slip. The tax code comprises of numbers and letters. The tax code is usually the tax-exempt amount an individual can earn which is divided by 10, with a post-fixed alphabet. For a better understanding, assume that the tax code is 1100L, which means 1100 turns into £11,000 earned before tax.

  • For more than one source of income, the tax code might have no number and begin with the alphabet “D” followed by numeric digits. In such cases, personal allowance is treated as the main income source, and everything earned from second income source is taxable
  • Tax code starting with alphabet “K” means that tax is due since the past year, or an individual receives money that can’t be taxed (e.g. State pension)

Sometimes the tax code isn’t right. Individuals who are on a new / first job and their correct tax code has not been mapped before the first pay-day, might be on an ‘emergency tax code’. This means an employee will be given a Personal Allowance that may not be the correct one. To make sure if the tax code is correct, match the tax code with the personal allowance an individual is getting. For any doubt regarding the tax code, please contact HMRC or specialized tax professional like DNS Accountant to resolve the tax issue.

HOW TO PAY

Employers usually deduct the NI from the wage and it is paid with taxes. The NI contribution is shown on the pay-slip. A director of a limited company might be an employee of the company and is liable to pay Class 1 NI through PAYE payroll. Let’s understand certain circumstances:

  • A self-employed must pay Class 2 and Class 4 NI depending on the income. People with special jobs such as businesses related to land or property do not pay Class 2 NIC
  • In case of multiple jobs, the employer will deduct Class 1 NI from the wage and the employee will pay Class 2 and 4 payments for his / her self-employed assignment

How is tax and National Insurance paid

Tax is payable if income is greater than the personal allowance in a year. The employer takes out the tax amount before giving the pay. The employer computes the tax through the pay-as-you-earn system.
Employer will also deduct National Insurance from the pay. NI is computed on a weekly or monthly basis, or however frequently the employee is paid.

HOW MUCH INCOME TAX WILL I PAY

The amount of money individual earns is referred to as the gross pay. The amount left after subtracting deductions like NI and tax is the Net pay. As an employee, individuals are liable to pay:

  • NIC if earnings are more than £155 a week
  • 12% of earnings higher than the limit, and up to £827 a week
  • The rate drops to 2% of earnings over £827 a week

How much tax will I pay calculator

For example, if an individual earn £1,000 per week, he / she pays:

  • NIL on the first £155
  • 12% on the next £672 (£827- £155 = £672) = £80.6
  • 2% on the next £173 = £3.4

HOW MUCH TAX WILL I PAY IN UK

To understand how much tax is due in the United Kingdom, let’s consider an example to understand the concept better.

  • Firstly, the personal allowance is computed on the individual’s income. The personal allowance computation depends on the tax-code the individual has received from HMRC
  • National Insurance is charged individually and it is charged against income above £149 per week

How much tax will I pay – Self employed calculator UK

Let’s understand how much tax will be paid on wages through an example. Let us assume the annual wage of an individual to be £24,000.

Particulars

Values

Monthly wage (£24,000/12)

£2,000

Tax computation

 

Personal allowance :

£833

Taxable income

£1,167

Basic rate tax @ 20%

£233

 

 

National Insurance computation

 

Income up to Primary threshold

£663

Income subject to National Insurance @ 12%

£1,337

National Insurance contribution

£160

 

 

Net Pay computation

 

Monthly Salary (£24,000/12)

£2,000

Basic rate tax @ 20%

(£233)

National Insurance contribution

(£160)

Take home pay

£1,606

TAX-PLANNERS FOR BUSINESS / EMPLOYEES – DNS ACCOUNTANTS

DNS Accountants is an experienced taxation and accounting firm in the United Kingdom, which offers entire range of tax planning services for owner-managed businesses and individuals across the country. DNS helps individuals understand their tax structure and compute the amount of tax payable. The team at DNS comprises of Chartered Accountants, and accounting and MBA professionals that help clients with their tax credits and services such as bookkeeping, auto-enrolment, accounting, self-assessment, and payroll-management and business start-up. Employees / employers can use DNS Accountants online pay calculator to have better understanding of their pay structure. The firm is very principled & delivers supreme customer service and client support. Use our HMRC Tax Calculator & Self Employed Tax Calculator

DNS Accountants help clients focus on maximizing their wealth. It’s impractical to expect any small-business owner to have a comprehensive knowledge of tax and National Insurance rules, DNS Accountants work with employees / businesses to work out their tax and NI contributions.



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