The People Bulletin

The payslip is a notification of pay (or pay advice/statement) that is provided to an employee on, or just before, each pay day. For example, if employees are paid weekly on a Friday the employer may distribute payslips to each employee that day or post them out to home addresses in advance of the Friday pay day. 

Key components

The payslip details:

• Total earnings before any deductions are taken into account including sick pay, maternity pay etc.
• PAYE – income tax deducted.
• NIC – National Insurance contributions.
• Pension contributions.
• Net pay.

This article looks more closely at some these in turn.

Pay As You Earn (PAYE)

Income tax is payable by every individual regardless of their age. 

Where an individual is an employee their employer is required by law to deduct tax from the employee’s employment income through the payroll; you are paying as you earn - hence Pay As You Earn (PAYE). It makes no difference whether they are part-time, casual, a student or a school leaver – or what age they are. 

Income tax is payable by the employee.  PAYE must be operated for all employees whose earnings exceed the statutorily defined limit which links to an individual’s tax code.

For the tax year, 6 April 2009 to 5 April 2010 there are currently two bands of income tax that could apply (details are on the HMRC website[1]). The level of employment income defines the band or bands of income tax that are due.

• Depending upon how much we earn, we pay either 20% or 40% tax.
• Note that from the start of the new tax year 6 April 2010 we see the introduction of the 50% tax band.

Tax codes

In order to calculate tax, a tax code notice is required.   The tax code will be generated by any of the following three events:

1.         New starter forms:

• P46 – form used by the employer whose employee is unable to provide a form P45.
• P45 – form the employee should provide resulting from their previous employment.

2.         Tax code notification. At the start of a new tax year which begins on 6 April of each year HMRC, in most cases will generate form P9 Tax Code Notification.

3.         Changes in tax code. In a new tax year HMRC may generate form P6 Tax Code Notification.  This happens when HMRC discover a change in an employees circumstances. An example would be if HMRC discovers an over/underpayment of income tax (PAYE).

Tax codes

£6475 is the annual amount of tax free allowance for a single person and over a tax year this will be divided into 52 or 12 portions, depending if the employee is paid weekly or month.

In order to obtain the tax code needed to calculate tax due for each pay period the end digit is dropped so we have 647 and as this is the standard single person’s allowance.  Suffix L is then added, resulting in a code of 647L.

As we have discussed the amount of employment income that is subject to tax is determined by the employee’s tax code.  There are many other variations of tax code which depend on employees circumstances.  Here are a few further tax code examples:

• T code suffix normally given when an employee’s tax affairs are being looked into - changed via individual coding notice P6 or P9 tax code notification.
• BR is basic rate so there is no tax allowance – just a straight 20% tax on the earnings. So someone earning   £200 per week will have to pay £40 in tax.
• NT means no tax to pay at all.

 Form P38(S) (student working in holidays) 

An employer will use this form if the employee takes a summer job. It is important to remember that to qualify the student must be in full-time education and return to school or college at the end of the holiday.

An example of the correct use of this form is when a school leaver who is going to college commences work, then leaves the job just before the holiday period ends and starts college. In this situation, the employer can use form P38(S) to prevent the worker from paying tax but the worker will pay NIC if pay reaches the earnings threshold in any pay period – we all have to pay NIC.

However, if a student works on a regular basis, say on a weekend and then works again the summer, and continues to stay in that job while attending college, that worker will not be permitted to be covered by the P38(S). 

If an individual is working regularly, as a result they will pay tax just like any other worker, no matter how old they are.  In this situation the worker will have to complete a form P46. 

No matter how regularly the employee works, whether as a student or not, you NIC is payable if the earnings threshold is exceeded.

 Form P6/P9:from HMRC to employer

 It is important to note that when HMRC generate either a P6 or a P9, HMRC will generate a form (P2) for the employee.  The payroll department cannot accept the form (P2) as proof of tax code.  An individual will receive a form like this once they are in employment. 

When ever there is a need for a tax code change HMRC will generate a tax code for the employee and send that in the form of a P6/P9 to the employer; however the employee will be informed via a form P2.  So, to confirm the tax code forms:

• employer form – P6 for in year code changes or;
• employer form – P9 for new tax year code changes; and
• employee form – P2.

Exemptions from PAYE

Some deductions that are made from an employee’s employment income are not liable to tax.  So how does the payroll department deal with such exemptions?

First the computer will look at the gross pay (top line) and work out tax but before tax is calculated the computer will check whether or not the person is:

• in the company pension scheme or;
• part of GAYE (give as you earn) or;
• in a SIP (share incentive plan) scheme.

If so these elements will be deducted from gross pay before tax is calculated meaning you receive what we call tax relief on these elements.

Why do we pay NIC and what is it?

NIC goes towards the National Health Service and entitles employees who earn at a minimum level to:

• state benefits from the government; and
• statutory benefits from the employer such as sick and maternity pay and a credit towards the state pension.

The National Insurance Contributions Office record National Insurance contributions and issue National Insurance numbers are known as NINOs. 

A NINO will be provided on a plastic card that looks a bit like a credit card.  An individual must keep this safe as it is a person’s personal ID for National Insurance purposes.

Importance of providing the employer with a National Insurance Number:

An incorrect NINO or no NINO at all could affect individual’s benefits as without the personal account number for NI, any contributions deducted from an employees pay will be held in a suspense account until claimed.  What we mean is that if an employer uses an incorrect NINO or none at all then HMRC (NICO part of HMRC) cannot allocate the NIC that the employer has deducted from pay to the individual NIC account.  The result is if an employee needed to claim state benefit such as Employment Income and Support Allowance, it will look like the employee had not paid enough NIC even though the employer has deducted the amount from pay.  This usually results in a deficiency and could ultimately affect entitlement to full state pension.

Employees are encouraged to keep hold of payslips to prove they have paid NIC.

Determining NIC liability

The following are some, but not all, of the considerations that have to be taken into account when determining if, and at what rate, NIC are due to be paid by the employee.

Employees do not have to pay NIC if the are under 16 or provide an age exemption certificate.  At present females are exempt at 60 and males at 65 – they stop paying NICs at this point even if they are still working. However, note that changes in the default retirement age are coming in and the retirement age for women is to be equalised with the male retirement age of 65 from April 2010 on a phased in basis. [2]

Employees who are members of their company pension scheme pay a lesser amount of NIC up to the accrual point.  This is because they will not need what is known as the state pension top up, S2P (Second State Pension).  The normal rule of thumb is that the contracted-out contributions will form the basis of a pension that will exceed what would have been provided by S2P.

NIC earnings limits and thresholds

Figure 1 summarises the different thresholds that determine the point at which we pay different levels of National Insurance (NIC).  The highlighted section indicates the amount employees are permitted to earn each week before they need to pay tax and NI.

Figure 1: Tax and NIC thresholds

NIC categories

There are many other types of work related situations that would affect what NICs an individual would pay but those detailed below are the most common circumstances.

• A - standard rate.            Not in a company pension scheme and not contracted out of S2P.
• D - standard rate.            In a contracted-out salary related company scheme (contracted out).
• F - standard rate.            In a contracted-out money purchase company scheme (contracted out).
• C - employer only.           The person is of retirement age but still working so is not liable for NICs. The employer, however, is still liable for Class 1A NICs in respect of that employee.
• X - No NIC liability           The individual is under 16 and working.

It is likely that the NIC table letter used will be shown on the payslip.

NIC summary

Before the employee’s NI liability can be calculated the employer needs to know:

• age to determine if the employee has to pay NIC;
• category to identify the rate of NIC to be deducted;
• the earnings period to determine which NI tables to use (in other words the weekly or the monthly ones); and
• what deductions might be exempt from NIC?

The payslip

The payslip, pay advice or pay statement is not presented in the same format for each employer. However all employers will include core information each pay period.  This will show gross pay (top line before deductions) through to the net pay (take home pay usually paid direct into the employee’s bank account).

A basic example of the payslip is set out in figure 2.  Employees should be able to relate some of the elements discussed above to the actual payslip content. It should be noted that this article is a summary of the basic procedures, but legislation determines how the employer should calculate the wages and salaries in a particular tax year that results in the payslip.

Figure 2: Sample payslip

[1] www.hmrc.gov.uk/paye/rates-thresholds.htm#2

[2] There is a useful summary on the Public and Commercial Services Union website here