This tax error could cost you thousands!

Do you really understand your pay slip? Get savvy now to guarantee you don't pay more tax than you should.

Is your pay slip nothing more than a mass of utterly incomprehensible numbers? Well, it’s about time that changed. It’s very important you understand what your pay slip means, while making a point of checking the figures every month to make sure there haven’t been any errors.

After all, how else can you be sure you’re paying the right amount of tax and national insurance or your company perks have been calculated correctly?

Your pay slip is usually divided into three main sections for payments, deductions and the year to date totals. Here I’ll breakdown what you’ll typically find in each one:

Payments

First of all, the payments section of your payslip includes details of your basic pay plus any overtime, bonuses, holiday pay and so on. It should also include any benefits-in-kind (company perks) you’re receiving, such as a company car allowance or fuel allowance, which may be subject to tax and national insurance deductions. All these elements will be included in your total gross pay.

Non-cash benefits-in-kind, including private medical insurance or childcare vouchers, should also be listed there too, but they aren’t normally added into the total.

If you’re paid monthly, check the gross basic pay in each pay period equals one-twelfth of the total amount you should receive for the year.

Recent question on this topic

• cazzieboo asks:

  I work part-time. When the tax code changes next year I'm thinking of cutting my hours so I earn under £7500. Is this a good idea so I don't pay tax?

  • 
    MikeGG1 answered "Don't do it on tax grounds. You are already working only part-time and your husband will be..."
  • 
    manzanilla answered "[i]Is it worth me cutting my hours to avoid paying tax on my wages and any taxable investments in..."
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Deductions

Next you’ll see the statutory deductions for PAYE tax - which shows the income tax which must be deducted from your pay - and national insurance (NI) which outlines the total contributions you have made in the pay period.

If you’re paying into your company’s pension scheme yourself your contributions (which attract tax relief rather than being taxable) will be shown here too. Often, if your employer is also paying into the pension on your behalf, the  contribution will be included even though it isn’t deducted from your pay.

Other deductions, such as charitable donations made through GAYE (give-as-you-earn), travel loans for commuters and union membership will be listed in this section too.

So, once all the deductions have been taken away from the payments, you’ll be left with a figure which represents your net (take home) pay.

Year to Date totals

There will usually be a third section on your pay slip which summarises the total payments and deductions for the year to date. Remember the year in question refers to the current tax year which runs from 6 April to 5 April the following year.

The Year to Date totals will most likely include the following:

• Your total gross pay for the year to date,
• Total amount of pay subject to income tax and the total amount of tax paid,
• Total earnings on which NI must be paid,
• Total amount of NI paid by you and your employer,
• Total pension contributions paid by you and your employer on your behalf.

How can you check tax and NI deductions from your salary are correct?

This tax year, everyone under the age of 65 is entitled to a tax-free personal allowance of £6,475 (with the exception of very high earners). The next £37,400 of your earnings is subject to the basic rate of tax which is deducted at a rate of 20%. Pay over this amount and up to £150,000 is taxed at the higher rate of 40%, while anything over £150,000 will incur additional rate tax of 50%.

Meanwhile, NI contributions must be paid when you earn more than £110 a week and up to £844 a week. NI for employees will be deducted at a rate of 11% of this earnings band. (Note that if you’re a member of your firm’s contracted out pension scheme, you’ll pay less NI).

You can use this income tax calculator to help you work out your own tax and NI deductions.

Other important information

As well as the three sections above, there’s other important information on your pay slip which you should look at closely. In particular make sure your tax code is correct. Your tax code determines how much you can earn before tax becomes payable. For most of you, the code simply reflects the tax-free personal allowance of £6,475. This would give a code of 647L.

Certain benefits you enjoy as part of your employment package - such as private medical insurance - may alter your tax code. The value of this perk must be deducted from your tax-free personal allowance. If the value of policy was say, £500, your personal allowance would reduce to £5,975, giving you a new tax code of 597L. HM Revenue & Customs (HMRC) will normally send you a PAYE Coding Notice which explains why the tax code has changed.

Don’t just assume your tax code is right. After all, HMRC has been known to send out incorrect coding notices before. Read How to get a tax refund to learn more about tax overpayments. If you think the tax code is wrong, speak to your tax office.

You should also check your pay slip shows the correct national insurance number. If it’s wrong there’s no way of keeping track of the contributions you have made to your NI record which could affect your entitlement to the Basic State Pension when you retire and other benefits such as jobseeker’s allowance.

Clearly, tax is a minefield and that’s why it makes good financial sense to check that all payments and deductions shown on your pay slip are as they should be. If the numbers don’t add up, speak to your payroll department pronto before it costs you a fortune. The earlier you highlight the error, the easier it will be to rectify.

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