The calculations can get quite complicated and how much you earn in employment affects how much tax and National Insurance you should pay on your self employment. In researching for this site, I discovered that it can be quite easy to pay too much National Insurance on your self employment income if you don’t know about the details of the regulations and if you assume that because you fill in your tax return with both incomes, it will be calculated correctly. This occurs because the National Insurance you pay on employment income (Class 1) is different from the National Insurance you pay on self-employment income (Class 4).

In both Classes of National Insurance, you pay nothing below a certain threshold, a higher “main” rate between that threshold and an upper threshold, and a lower “additional” rate above that threshold. If you are employed and self employed at the same time, you can end up paying a lot of the “main” rate on both of your incomes, whereas if you earned the same amount just from either employment or self employment, some of your income would be charged only the lower “additional” rate of National Insurance. Fortunately, HMRC know this and they will, if requested, take into account any National Insurance you paid through your employment when working out how much you owe them for self-employment. Unfortunately, they won’t do this by default – you need to ask for it.

This is done by applying for exemption of Class 4 National Insurance contributions. This doesn’t mean you pay no Class 4 (unfortunately!), it just means that they will take into account how much Class 1 you have paid when working out how much Class 4 to charge you. If you don’t apply for exemption, they will charge you the standard amount, which might be more than you owe. Luckily, you can apply for a refund if you have overpaid in previous tax years (although not normally until 1st February the year after you overpaid). As a rule of thumb, if each of your employed and self-employed incomes were more than the lower NI threshold (£7,605 for the 2012/13 tax year) and the total of the two incomes was close to or  more than the upper NI threshold (£42,475 for the 2012/13 tax year), you might be due a refund.

To make this easier, there is a new calculator on Employed and Self Employed which will help you work out if you might be due a National Insurance refund. Choose the tax year you’d like to check (as far back as 2005 / 6 – the thresholds were lower in previous years), enter your employment income and self-employment profit for that year, and the amount of Class 4 National Insurance you paid that year. The calculator will compare that with what it expects you to have owed for that year, and will let you know if a refund might be due. There are details on that page for how to contact HMRC and how to claim the refund. The calculator will do its best with the data you provide but it might not agree exactly with HMRC’s calculations – it can be used as an indicator and HMRC will be able to confirm whether or not a refund is due.

Good luck!

Income-contingent Student Loans are repaid from the April after you complete your course, at a rate of 9% on any gross income above this threshold. This is similar to the way income tax is calculated – i.e. a percentage of any income above a certain “free” allowance. However, while the tax-free allowance usually increases by a small amount each year, the student loan repayment threshold has been steady at £15,000 since April 2005 – before that, it was £10,000. If you’ve been paying off your student loan for a few years now, you may be surprised to see this change. More information is available from the Student Loan Repayment site. The Salary Calculator is up-to-date with this change to the repayment threshold.

If you are repaying your student loan and you think you might be close to paying it off, this earlier blog post about Student Loan over-repayment may be of interest to you.

For example, if the full-time salary is £20,000 per year for 37.5 hours’ work per week, the pro-rata salary based on a 18-hour working week would be:

£20,000 x (18 / 37.5) = £9,600

Income tax, National Insurance and other deductions are then calculated based on this new salary. To use this new tool, you just need to enter the full-time salary, the full-time hours, and the new hours that the pro-rata salary is to be calculated from. To check it out for yourself, get started with the pro rata Salary Calculator.

Click the image for a larger, interactive version

As you can see, in most cases the Americans get to keep more of their hard-earned cash than we do. The top rate of federal income tax is 35% in the USA, and they only start to pay that if they earn more than $398,100 in a year – compared with 40% tax in the UK if you earn more than £42,475 and 50% if you earn more than £150,000. Also, Social Security is charged at 5.65% of most incomes, compared to National Insurance which is calculated at 12% (although only above income of £7,605 per year). You might have heard in the news some people saying that the 50% tax rate makes Britain unattractive for wealthy business people – this is what they are talking about – if you could run the same business in the USA and pay tens or hundreds of thousands less in tax each year, you’d think about moving – making any British employees you have redundant and employing Americans instead.

However, before you start packing your bags, there are a few other things to consider. Firstly, you can see from this zoomed-in version of the chart that if you earn less than about £12,000 per year, you actually get to keep more of it here in the UK than you would in the US:

Click the image for a larger, interactive version

Also, these calculations only include federal income tax and Social Security – most of the states charge separate income tax on top of what the central government takes, which The Salary Calculator doesn’t currently work out. Another consideration is that in the UK we can rely on the NHS to provide us with healthcare if we need it either for free or for a relatively small prescription charge, but in the USA health insurance can cost thousands of dollars per year.

Also, it can be difficult to get a decent cup of tea.

You can read more about US tax rates on The Salary Calculator (US).

If you are both employed and self employed at the same time, or change from employment to self employment during the tax year, your tax liability can be quite complicated. Your employment income will have been taxed by your employer, but the amount of self employment tax and National Insurance you pay will be affected by how much you have already paid through normal employment.

A new sister site for The Salary Calculator has been launched to try to help in this situation. Simply called Employed and Self Employed, there is plenty of information available and links to details from HMRC. There is also a complex tax calculator which will try to estimate your tax liability based on the information you provide.

Tax and National Insurance details which take effect from 6th April 2012 are applied, although previous tax years from 2009 onwards are also available for calculations (including the current 2011 tax year). If you are interested in the figures involved, you can check out the details page which contains detailed information from HMRC.

However, the Chancellor took the opportunity to outline plans for income tax from April 2013, and there will be a few changes. Firstly, the under-65 tax free allowance will be increased from April 2013 to £9,205,  in line with the coalition pledge to increase the tax-free personal allowance to £10,000 before the next election. This is an increase of £1,100 on the April 2012 value, saving those on low and middle incomes up to £220 per year. However, the increased personal allowances currently available to those over 65 will be frozen and, for those not yet receiving the increased allowances, replaced by a single allowance for all ages (although this change will not take immediate effect).

Another change in 2013 will be to reduce the top rate of income tax, paid by those earning over £150,000 per year, from 50% to 45%. The 50% rate was introduced by the Labour government, where previously such income would have been taxed at 40%. This will be popular with traditional Tory voters but Labour are complaining that the richest are getting tax cuts in this time of austerity.

The Salary Calculator will be updated with the April 2013 values nearer the time – in the meantime, you can see what the April 2012 changes will make to your pocket each month by checking The Salary Calculator 2012. There is also a comparison utility so you can easily see the difference between 2011 and 2012.

All of us will be affected by changes to income tax and National Insurance following his budget speech – as reported in a previous blog post, The Salary Calculator has been updated with the latest budget information to show you how your take home pay will change next month. Get started with The Salary Calculator for the April 2012 budget.

Screenshot of the graphical representation link

Click on this link, and an overlay will pop up, to show you an interactive pie chart that clearly explains where your money goes each year:

Example pie chart of UK salary deduction breakdown

Of course, it will also show pension and student loan deductions if those apply to your calculations. To get started, head over to The Salary Calculator and enter your details. I hope you find this new tool useful – please use the comments section below to leave any feedback or suggestions for improvements.

Click the image for a larger, interactive version

Take home is in blue – the red section on top is the tax you pay, and the yellow section on top of that is National Insurance. For those of you paying off your student loan, here is a version with those deductions on top, in green:

Click the image for a larger, interactive version

So you can see that as your salary goes up, your take-home pay (the blue line) always increases… but the higher your salary is, the slower your take-home pay increases with each pay rise, as more of it is going to the government.

This year, the standard personal allowance (the amount you are allowed to earn each year tax-free) has been increased from £7,475 to £8,105 which will mean that most of us will pay less tax. However, for higher earners, the threshold of taxable income for the 40% tax rate has been lowered from £35,000 to £34,370 – which will reduce the improvement from the increased personal allowance (although you should still be better off!). The National Insurance thresholds have also increased slightly, which all goes towards helping you bring more money home each month.

For those paying into pension schemes through their employer there is a change which may affect the amount of National Insurance you pay. Firstly, the NI rebate on “contracted-out” salary related schemes has reduced from 1.6% to 1.4% – which will mean you pay a little more National Insurance than in 2011. However, those paying into a money-purchase pension scheme will find that from April 2012 this is no longer considered “contracted-out”, so you will get no rebate at all. You can see what a difference this will make by un-ticking the “Contracted out” option on The Salary Calculator. More information is available in this goverment document explaining the change [PDF].

Head over to The Salary Calculator to see what a difference this will make to your pay packet next month – there’s even a comparison utility which shows a breakdown of the difference between 2011 and 2012.

You can read more about the April 2012 tax and NI rates on The Salary Calculator’s about page, or these useful pages from HMRC:

• HMRC Income Tax info sheet
• HMRC National Insurance info sheet