Understanding Your Payslip

Posted: Thursday December 31 2020

By: Abbie Coleman

Everyone loves to receive a payslip, but how many employees pay attention to the payslip they receive each month?

Understanding Your Payslip


A payslip contains so much valuable information, how much tax is being paid, details of workplace benefits and how much is being paid into pension.

Many people are probably guilty of discarding their payslips because they seem too complicated, however it is so important to check your payslip regularly as you could be paying too much or too little tax.

Tax Code

The government uses this code to track tax payments.  There are lots of different tax codes and employers use this code to work out how much tax to deduct from pay. If the applied code is wrong, too much or too little tax could be paid.  It is important to check that the correct code is being used each pay day.

Gross Pay

Also known as ‘basic pay’ or ‘gross income’.  This is the total amount earnt before any deductions have been taken off.

Take Home Pay

Also known as ‘net pay’, this is the amount that gets paid into the bank, after any deductions have been taken off.

Deductions

There are various deductions that could impact the amount received on pay day.  Tax, national insurance, student loan repayments, workplace benefits and pension contributions are a few examples.

Spotting any discrepancies early on is important.  For example, if the wrong amount of National Insurance is paid throughout your working life, your state pension could be affected at retirement.

What is the personal allowance?

This is the amount of money you can earn each tax year before income tax is paid. It can vary depending on circumstances.  In the 2020/21 tax year the Personal Allowance is £12,500.  Someone usually only starts paying income tax on amounts earnt above this threshold.

Income Tax rates and bands in the 2020-2021 tax year are as follows:

Band Taxable income Tax rate
Personal Allowance Up to £12,500 0%
Basic rate £12,501 to £50,000 20%
Higher rate £50,001 to £150,000 40%
Additional rate over £150,000 45%

# Understanding your payslip

What is National Insurance?


By Lisa Vaughan – Lisa Vaughan Financial Planning Ltd

National Insurance is a tax on earnings.  National Insurance contributions are paid into a fund, from which some state benefits are paid.  This includes state pension and maternity allowance.

You need to pay into National Insurance for a set number of years to be entitled to receive the state pension.

A National Insurance number is used to identify you so the government can track how much tax has been paid and how much state pension entitlement has been accrued.  Each person is assigned a National Insurance number containing two letters, six numbers and a final letter.

An employee pays Class 1 National Insurance contributions on earnings. In addition, an employer will be required to make a secondary contribution.

Record Keeping

It is important to store payslips in a safe place.  They contain lots of personal information that would be valuable to those carrying out identity fraud.  Payslips also provide evidence of earnings and tax paid and such information may be needed in the future.  For some financial products, such as mortgages, payslips may be required to prove earnings before approval is granted.

Tips for Saving Money

Whether you want to start saving to put some extra cash in reserve, to pay off debt or even for something bigger like a house deposit, you don’t need to earn lots of money to start saving and you’ll be surprised at how much you can build, if you set aside just a small amount regularly.

To help you decide how much you can save, you should make a budget.  The best way to start is to understand what you pay each month in expenses.  Be realistic as it is so easy to underestimate how much you spend, so try and include everything from coffee purchases to travel costs.  Deduct these costs from your net pay to see if you have anything left.  Allocate some or all of what you have left towards savings.  Alternatively, you can follow the advice of Warren Buffet, who was quoted as saying,

“Do not save what is left after spending, but spend what is left after saving”

Lisa Vaughan FPFS

Chartered Financial Planner

www.lisavaughanfp.co.uk

To receive a complimentary guide covering wealth management, retirement planning or Inheritance Tax planning, contact Lisa Vaughan Financial Planning Ltd on 0113 244 4054 or email lisa.a.vaughan@sjpp.co.uk.

#Understanding your payslip