What deductions might I have when I get paid?
When you start your first job, receiving your first payslip can be both exciting and confusing. While it’s great to see your hard-earned money going into your bank account, understanding the various deductions can be a bit of a puzzle.
It’s a bit like unboxing a brand new video game console – you’re eager to dive into the experience, but you’re also faced with a tangle of cables and buttons that seem as complex as a spaceship’s control panel. Just as you’d need to figure out how to use the console to fully enjoy your gaming, it’s essential to decode the various deductions on your payslip to make the most of your hard-earned money.
In this article, we’ll demystify the common deductions you might find on your payslip (in England), making it as understandable as your trusty smartphone.
Note: If you work in Scotland, Wales or Northern Ireland, the types of common deductions are the same, but the details of how much might be deducted can differ – we’ll soon be publishing tailored articles for each country in the UK.
Common deductions
Income tax
One of the most noticeable deductions on your payslip is income tax (probably labelled as PAYE). This is what the government uses to pay for public services, such as schools and the benefits system, and for public projects, such as road works and social housing.
The amount you pay depends on your total income over the year. In England, there are several tax “bands”, and how much you pay depends on which band your earnings fall into. For the current 2023/2024 tax year (which begins on April 6th), these tax bands are as follows:
Personal Allowance: No income tax is paid on the first £12,570 you earn in a year, provided you are under 65 years old and earn under £100,000. People who are blind get an additional allowance.
- Basic Rate: Earnings between £12,571 and £50,270 pay 20% income tax.
- Higher Rate: Earnings between £50,271 and £150,000 pay 40% income tax.
- Additional Rate: Earnings above £150,000 pay 45% income tax.
For example, if your salary is £20,000 a year, you won’t pay any income tax on £12,570 of that. Then you’ll pay 20% income tax on the remaining £7,430 (£20,000 – £12,570 = £7,430), which is £1,486 a year. So, you might see a £124 deduction on your payslip (£1,486 ÷ 12 months in a year = £123.83).
Your employer will deduct the appropriate amount of income tax from your salary each pay period based on your earnings.
National Insurance contributions
National Insurance (NI) is another significant deduction from your payslip. The government uses these contributions to pay for state benefits, including the NHS and State Pension. The contributions you pay depend on how much you earn and whether you’re employed or self-employed. You stop paying National Insurance contributions when you reach State Pension age. They are categorised into different classes.
Here’s a summary of the different classes:
If you’re employed and earn more than £1,048 a month from one job, you’ll be in Class 1. Therefore, 12% will be deducted if you earn between £1,048 to £4,189 a month. 2% will be deducted if you earn over £4,189 a month.
If you’re self-employed, you’ll fall into Class 2 or 4 depending on how much profit you’re making. See the different rates here: https://www.gov.uk/self-employed-national-insurance-rates
If you don’t fall into Class 1, 2 or 4, then you are not required to pay NI. However, you might choose to pay Class 3 voluntary contributions, which might be either £3.45 or £17.45 a week. This is because the number of years that you’ve paid NI can affect how much you receive as State Pension (you must have paid NI for 10 years to receive the minimum State Pension and 35 years or more to receive the full State Pension).
Other deductions
Other likely deductions include pension contributions, student loan repayments or employer benefits. These should be clearly labelled on your payslip.
Pension contributions: if you’re part of a workplace pension scheme, then 5% of your salary will automatically be put into a pension for you. Your employer will also contribute at least 3% of your salary, and some employers choose to contribute more. You can opt out of a workplace pension scheme, but it’s an easy way to save for your retirement and since your employer adds to your pot too, you’ll build up a larger retirement pot than only having a private pension.
Student loan repayments: if you’ve taken out a student loan to pay for university or other higher education, your payslip may show deductions for student loan repayments. The amount deducted depends on your income and the specific terms of your loan. You should be able to check these terms with the loan provider.
Employer benefits: your payslip may include additional deductions for various reasons, such as union membership fees, service tips or workplace benefits like health insurance or a company car. These deductions are specific to your employment and will vary from one job to another. You should be informed of them when first begin your job and you might be able to opt out of them.
Summary
Understanding the deductions on your payslip is vital for managing your finances effectively. While these deductions may seem complex at first, they play a crucial role in funding essential public services and securing your financial future.
Take the time to review your payslip carefully, and don’t hesitate to seek guidance from your employer or a financial advisor if you have any questions. With a clear understanding of your payslip, you’ll be better equipped to make informed financial decisions as a young adult in the workplace.
