Your Payslip Explained – 9 key points!

When that special day comes around and you get the little ping on your phone to say that you have been paid, we all have been guilty of planning how we are going to spend the money before considering why we received the amount we did. 

When you look at your payslip, you may also just think that it ‘looks about right’…

We at Edge Tax frequently receive enquiries from taxpayers who have not made the correct contributions of income tax or national insurance through their employment. Our aim is therefore to provide a simple guide that enables individuals to calculate if their payslip is up to snuff.

Your payslip explained

Using the fake payslip below, we will walk you through some of the more common entries that you will find on your payslip.

Gross pay

Gross Pay on a payslip refers to the total income earned before any deductions for Income Tax and National Insurance. This includes your basic salary/income, as well as any additional earnings such as bonus’ or over time. In our example, we can see a gross pay of £2,500, this represents a £30,000 salary split over 12 months.

Income Tax

All UK resident individuals and certain non-resident individuals earning under £100,000 per annum are entitled to a personal allowance of £12,570. This is an amount of income which an individual may earn tax-free. Income received in excess of this amount will be subject to tax.

Following the tax-free £12,570 of earnings, the next £37,700 (up to £50,270 gross) is subject to tax at 20%, this is your ‘basic rate’. The following £74,870 (up to £125,140) will be taxed at 40%, this is your ‘higher rate’ income. Finally, the income in excess of 125,140 will be subject to tax at 45%, this is your ‘additional rate’ income.

For every £2 an individual earns over £100,000 their personal allowance will be reduced by £1, as such by £125,140 their personal allowance will be nil. This effectively increases the amount of income which is taxable at the basic rate.

PAYE works by calculating a person’s entitlement to personal allowance, basic rate, and higher rate using the year-to-date figure; this amount considers the amount of income that has already been subject to tax. If the individual has a break in employment, this method ensures that the correct tax should be collected for the year.

In our example payslip, the annual gross pay is a £30,000 salary, we will take the tax-free amount from this, the remaining amount of £17,430 will be taxable at the ‘basic rate’ of 20% yielding a tax payable for the year of £3,484.00.

National Insurance

For those under the pensionable age (currently 66) and earning over £1,048, you will have to make Class 1 Primary National Insurance contributions.

From 6 January 2024, national insurance saw a cut of 2% from the previous 12% to the current 10%, following the 2024 spring budget Jemery Hunt announced a further 2% cut to 8% from 6 April 2024. This will affect those earning between £1,048 and £4,189 per month. People earning over £4,189 per month will still be subject to national insurance at 2%.

For our example payslip, the payroll month is March 2024 and so National Insurance is due at 10%.

Pension Contributions

While to most retirement feels like an unobtainable dream that gets further and further away, individuals above the age of 22 are automatically enrolled into their employers pension scheme.

The minimum contribution that can be made into a pension pot is 8% of an individual’s gross earnings, of this 8% your employer must contribute at least 3%. Where a company puts in a higher percentage, the individual may lower their contribution to meet this 8%.

Our payslip example, the relevant earnings are £30,000 and the individual is making a 5% contribution into their pension pot ((£30,000 / 12 months) x 5%).

Student Loan Repayments

Those with a higher education will be required to make payments toward their student loans if they earn above a certain threshold. This repayment threshold varies depending on the repayment plan you are on and the country in which you completed your education. These are as follows:

• Plan 1 – if you started your course before 5 April 2012 you should be on plan 1 and so will have to start making contributions towards your student loan when you earn over £22,015 a year or £1,834 per month.
• Plan 2 – if you started your course between 1 September 2012 and 31 July 2023, you should be on plan 2 and so will have to start making contributions towards your student loan when you earn over £27,295 per year or £2,274 per month.
• Plan 4 – if your course was funded by Student Awards Agency Scotland, you should be on plan 4 and so will have to start making contributions towards your student loan when you earn over £27,760 per year or £2,305 per month.
• Plan 5 – if you started your course after 1 August 2023, you should be on plan 5 and so will have to start to making contributions when you earn over £25,000 or £2,083 per month.

Where an individual earns above this gross threshold they will be required to make a contribution of 9% of the income above this threshold. Those with a postgraduate loan will be required to make a 6% contribution for their income in excess of £21,000 or £1,750 per month.

In our example, Joe is on Plan 1, and so earns £7,985 above the threshold. He will therefore have to make a contribution of £718.65 per year or approximately £59.00 per month (rounding aside).

National Insurance number

A National Insurance number (NINO) is used to uniquely identify you in the UK tax system. It also ensures that the National Insurance contributions (NIC) or taxes you pay are properly recorded on your HMRC record.

To obtain a NINO you must be 16 or over and resident in Great Britain or Northern Ireland.

Tax Code

Your tax code is used by your employer to determine how much income tax needs to be deducted from their employees pay. Due to the sheer volume of possible tax codes, we will refrain from listing every single code combination and instead note the more commonly codes seen on a payslip.

1257L – This is the tax code currently used from most people who have one job. However, this isn’t just Larry from HMRC’s phone code, this code actually has a meaning. To ascertain this, lets first split the code into ‘1257’ and ‘L’. The 1257 denotes that an individual has £12,570 of personal allowance, as such, a 880L code for example, would show me that the individual has some reason for a restricted personal allowance of £8,880. Next is the L, this denotes that the person is under 65 years young and they earn under £100,000 per year.

Codes ending with W1/M1/X – These are known as ‘emergency codes’

NI table

It is crucial to understand your NI category as this determines how much National Insurance you will have to pay. 

A – People aged 21 to state pensionable age (66), and don’t have any special circumstances (as mentioned below.

B – Married women and widows entitled to pay reduced National Insurance. (This stopped in 1977, but if you opted in before this and has not stopped this at any point, you may still be able to pay the lower rate).

C – Employees over the State Pension Age.

H – Apprentices under 25.

J – Employees who can defer National Insurance because they’re already paying it in another job.

M – Employees under 21.

V – Employees who are working in their first job since leaving the armed forces (veterans).

X – Employees who do not have to pay NI, for example they’re under 16.

Z – Employees under 21 who can defer National Insurance because they’re already paying it in another job.

Net Pay

This is the exciting bit that we all (not so) secretly care about the most. Your net pay is the amount that you will be actually receiving into your bank account.

This is calculated by taking your Gross Pay (1) then subtracting your Income Tax payable (2) and any National Insurance contributions (3), Pension contributions (4) and Student Loan repayments (5).

As to not make this article an exhaustive list, we haven’t included every possible line that could appear on a payslip; however, there are a magnitude of other categories that can appear, such as:

Expenses – Employees may incur expenses in the course of their employment that the employer will reimburse them for, such as car parking at a client meeting. These expenses will be added to the individual’s gross pay; however, they will not be subject to income tax or national insurance provided they have been incurred wholly, exclusively and necessarily in the course of perform of employment duties.

Mileage reimbursement – when an employee travels for work (outside of their regular commute), an employer may seek to reimburse them for the miles incurred. HMRC has official rates that employers can use to reimburse employees; this seeks to reimburse the employee not only for the fuel cost but also for the wear and tear on the vehicle. Like expenses, this reimbursement will be shown on the payslip as gross income and will not be subject to national insurance and income tax.

Payrolled benefits – When an employee received a taxable benefit that is not included on their annual P11d it will instead be payrolled – this means that income tax is collected at source through your payroll rather than via self-assessment.

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