I always get told by people that they think ‘they are being taxed too much’ and the ‘employer is taking too much of their money’.

It is the employers’ responsibility to pay HM Revenue & Customs the tax and National Insurance Contributions due by the employees.

But it is the employees’ responsibility to inform HM Revenue & Customs of any changes that may affect how much tax they should pay.

Every employer is obliged to give each employee a payslip either on a weekly or monthly basis, and at the end of the tax year a P60 which should portray employment income and the tax paid for the tax year.

Employees that have other untaxed income from elsewhere may be required to complete a tax return. I will write about the ‘Completion of Tax Returns’ in a future blog.

In this blog I will briefly explain how the ‘gross pay’ goes through the PAYE system resulting in the ‘net pay’ figure.

Three major assumptions for this calculation are that the individual is only employed at one job and they are on a ‘1100L’ (currently for 2016) Tax Code and they have no other untaxed income to report.

For this example we will also assume that the individual earns £25,000 gross per annum.

The tax code 1100L is a standard tax code for most employees, the letter ‘L’ means that the individual is entitled to a personal allowance, and the numbers ‘1100’ is the amount of personal allowance available to them, this is usually multiplied by 10 giving you £11,000. Currently for 2016, the total standard personal allowance is £11,000. This figure reflects the tax free amount an individual can earn in the tax year.

Therefore, taking the above example, £25,000 gross income less the personal allowance of £11,000 leaves us with a taxable income of £14,000.

Bearing in mind the above assumptions the £14,000 is subject to a rate of 20% tax which is £2,800.

Currently, for 2016, the 20% tax rate is a basic starting tax rate. After taking account of personal allowance, upto £54,000 income is subject to this rate. However, any income thereon upto £150,000 is subject to 40% tax and any further income is subject to 45% tax.

Before we can calculate the net pay, we need to deduct the National Insurance Contributions which is another aspect of PAYE alongside tax.

There are several ‘Class’ of National Insurance Contributions, NIC.

Different Classes of NIC are paid by individual with different criteria’s of income such as self employed individuals are required to pay Class 2 which is a standard rate every week, also they are obliged to pay Class 4 National Insurance at the end of the year which is a percentage of total profits.

However, like the tax system, there are allowances for National Insurance Contributions, but the allowances differ from Class to Class.

As an employee you must pay Class 1 National Insurance Contributions, for 2016, this is currently 12%.

The current allowance is £155.00 per week, therefore £8,060 per annum.

Back to the example from above, £25,000 gross income less £8,060 leaves us £16,940 which is subject to National Insurance Contributions.

To summarise, the tax bourne is £2,800 and the NIC is £2,032.80, by deducting both of these amounts from the gross £25,000, it leaves us with £20,167.20 which is the annual net pay.

Let me know if you think you are paying too much tax, more importantly, let me know if you think you are paying too less, as H M Revenue & Customs might come after the amounts in the future bearing penalties and interest.