With recent changes to the amount of National Insurance being paid, we thought we’d take the time to show how you get from your gross salary down to the net salary you actually receive in the bank. We’ll use Sally as our example, she earns a gross salary of £5,000 per month.
Extra employers costs – First, before you even get started, the government has created this sneaky tax called Employers National insurance. You don’t even see this but it’s added on top of your gross salary and paid across to HMRC. The second amount here is the employer’s pension contribution. If you decide you want to pay into your pension your employer needs to top it up by 3%.
Note – neither the % applied for Employers National Insurance or your pension is calculated on your full £5k base salary.
Employers National Insurance – the government has called this Employers National Insurance, but it’s a sneaky tax. It’s you paying the tax as the employee because if you weren’t employed they wouldn’t need to pay it! It’s tax on your earnings over £758.01 a month. So, (monthly salary) £5,000 – £758 = £4,242. £4,242 x 15.05% = £638.41.
If you’re paying into your pension scheme then your employer needs to contribute 3% on your qualifying earnings towards your pension. Qualifying earnings are your earnings over £520/month and less than £4,189 a month. So, if you earn more than £4,189 per month the calculation is £4,189 – £520 = £3,669. £3,669 x 3% = £110
Now your taxes actually start to kick-in. Let’s take a look…
Employee National Insurance – ah, this sneaky tax comes up again, not only did your employer get stung but now you do too (presumably you would have a higher base salary if not for this tax as it is effectively a cost of employment). This is calculated in three parts:
1. Salary less than £823 x 0% = -£0.00
2. Salary more than £823 and less than £4,189 = £3,366 x 13.25% = £446
3. Salary more than £4,189 x 3.25%. So for Sally £5,000 – £4,189 = £811 x 3.25% = £26
PAYE – Pay-as-you-earn, a tax introduced in 1944 where income tax is deducted from wages by employers. This amount is worked out based on your tax code for the typical person earning £5k a month it comes to £952.47.
Employee pension – here’s what you’re pinning all of your future dreams on, that retirement island you’ll buy next to Branson. For workplace pension schemes the starting contribution is 5%, and actually that works out as you contributing 4% of your monthly salary and the government topping that up by 1%. (Note the 4% is not usually calculated on your full salary).
Student Loan – depending on the plan you’re on, you repay a certain % each month only on what you earn above a set threshold.
Net Wages – congratulations, you’re left with £3,130 to spend for the month, and see below for a nice summary of all the tax Sally’s paid!