Pay As You Earn

Social care tax proposed from April 2022

by Admin

The government announced yesterday plans to introduce new social care tax, intended to help reduce the costs incurred when a person goes into care. If the bill passes parliament, this will mean be an increase in National Insurance contributions of 1.25 percentage points from April 2022, to be replaced by a separate tax of the same amount from April 2023. The benefit of this additional tax, in England at least, is that care costs will be capped at £86,000 (less if you don’t have that much in savings / assets). Scotland, Wales and Northern Ireland set their own social care policies, but will receive additional revenue from the tax generated.

The plan has drawn criticism from many who see it is a tax paid by low- and middle-income employees to subsidise wealthy retirees. It also appears to be a break of a manifesto pledge not to raise income tax, National Insurance or VAT – the justification for which, put forward by the government, has been that the pandemic has changed things.

This BBC article has a clear summary of the changes in more detail, as well as a chart showing how much extra tax you’ll pay depending on how much you earn. The bill still needs to pass parliament, but when this and other changes from April 2022 are confirmed, The Salary Calculator will be updated with the latest rates so that you can see what a difference it will make to your take-home pay.

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Wednesday, September 8th, 2021 Income Tax, National Insurance, Savings No Comments

None of the content on this website, including blog posts, comments, or responses to user comments, is offered as financial advice. Figures used are for illustrative purposes only.

Our guide to unpacking tax jargon

by Madaline Dunn

When it comes to tax, many people often feel intimidated and confused by the jargon used to explain certain terms and concepts. Of course, people must understand the ins and outs of tax jargon themselves because their personal finances can be affected by tax changes.

At The Salary Calculator, we’re here to make sure that you’re all clued up on the meanings behind complex tax jargon.

This article will go through some of the most common words and phrases used when discussing personal tax. So, don’t sweat it; you’ll know the score in no time at all.

Tax terms explained

Agent: This term refers to, usually, an accountant or advisor, who an individual appoints to take care of issues and processes related to HMRC on their behalf.

Annuity: This is a type of retirement income product that pays an individual a fixed payment stream.

Capital Gains Tax: This is a type of tax that is applied to the profits an individual earns in the sale of an asset. It is charged at a flat rate of 18%.

Defined Benefit Pension: Otherwise known as a “final salary” pension, this is the traditional pension plan that pays out a retirement income, calculated based on one’s salary and the number of years they’ve worked.

Defined Contribution Pension: Also referred to as a “money purchase” pension, this is a pension savings product that allows employers and employees to contribute and invest funds to build the pension money pot. 

Earned Income: This refers to the income that an individual receives from employment, self-employment or directorships. This includes wages, salary, tips, bonuses, and commissions.

Foreign Income: This is the income an individual receives from work or services performed outside of the UK. Income received from the Channel Islands and the Isle of Man is also classified as foreign income.

Individuals must pay income tax on foreign income if it comes from:

  • Wages earned abroad
  • Foreign investment
  • Overseas properties
  • Overseas pensions

HMRC: This is an abbreviation that stands for HM Revenue & Customs and is a non-ministerial department responsible for dealing with tax and financial obligations.

Income Tax: This refers to the tax that the government levies on an individual’s personal income. Once income exceeds the personal allowance, an individual will pay tax. The amount of tax they pay will vary depending on earnings. 

Inflation: This is an economic term that refers to the rate at which goods and services rise.

Inheritance Tax: This is the tax an individual pays when they have inherited money or property from someone who has died. The standard inheritance tax rate is 40%. However, this is only charged once an individual’s estate exceeds £325000.

IR35: This is a piece of UK tax legislation that exists to identify contractors and businesses that avoid tax by working as “disguised” employees.

Minimum Wage: The National Minimum Wage is the minimum amount of money an employer must pay an employee per hour. These rates vary depending on age and role. The current rates are:

  • National living wage for employees aged 23 and over: £8.91
  • Age 21-22: £8.36
  • Age 18-20: £6.56
  • Under 16-17: £4.62
  • Apprentices: £4.30

National Insurance (NI) Contributions: Employees and self-employed workers must make National Insurance (NI) contributions if they are over 16-years-old. The amount of NI contributions you make impact your entitlement to state benefits. Individuals must complete at least 35 years of NI contributions to get the full new state pension.

There are a few different types of NI contributions, this includes:

  • Class 1 contributions are made by employees who earn £183 a week, who are below the State Pension age
  • Class 2 contributions are made by self-employed workers who earn £6,515 or more per year
  • Class 3 contributions are voluntary contributions made by individuals to fill in contribution gaps
  • Class 4 contributions are made by self-employed workers who earn £9,569 or more per year

PAYE – “Pay As You Earn”: This was introduced way back in 1944 refers to the system through which employers deduct income tax and National Insurance contributions from employees’ salary and send it to HMRC. It’s calculated based on earnings and eligibility for personal allowance.

Personal Allowance: This is the amount of money an individual can earn before they are taxed. The personal allowance amount for 2021/22 is £12,570. It will be frozen at this amount until 5 April 2026.

P45: When an individual stops working for their employer, their employer must give them a P45. This outlines the amount of tax an individual paid on their earnings in the tax year and their tax code.

A P45 is made up of 4 different sections:

  • Part 1, an employer must send to HMRC
  • Part 1A is given to the former employee for their records
  • Part 2 and 3 are for the individuals’ new employer

P60: This is the form that a worker receives each year, outlining the amount of money earned in a year. It also states the amount of National Insurance contributions made and the amount of Pay As You Earn (PAYE) income tax. 

Self Assessment: This is the system used by HMRC to calculate and collect income tax and National Insurance (NI) contributions. Self-employed and freelance workers must submit a self-assessment form for each tax year.

Starter checklist (formerly the P46 form): This is the form that replaces the P45 form in cases where their former employer did not give an individual one.

Take-home Pay: Take-home pay, otherwise known as net pay, is the amount of money an individual receives per month after tax and any other deductions have been made.

Tax Code: In the UK, everyone paid via the PAYE scheme is allotted a tax code from HMRC, which indicates how much tax must be deducted. The most common tax code appears as a set of numbers followed by a suffix. 

Tax Credits: This is a type of government benefit payout given to individuals who receive lower incomes. This benefit comes in two forms, working tax credits and child tax credits.

Tax Rebate: This is a refund of tax given to an individual when they have overpaid tax.

Tax Year: This is the time period covered by a tax return. It begins on 6 April and ends the following 5 April.

Unique Taxpayer Reference: This is a 10-digit number issued to every taxpayer in the UK.

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Updated for April 2021

by Admin

The Salary Calculator has been updated with the tax rates which take effect from 6th April 2021. Some of these rates are still subject to confirmation by the relevant governments, but the calculator will be updated if any of them change.

The biggest change is the introduction of “Plan 4” student loan repayments, for Scottish students. If your undergraduate loan is administered in Scotland and due for repayment you will start repaying under Plan 4 from April 2021, even if you have been previously repaying under Plan 1. Those already repaying their loans will switch from Plan 1 to Plan 4 repayments in April. This change does not affect students in England, Wales or Northern Ireland, and nor does it affect repayment of postgraduate loans.

If you would like to see the effects of this change, and any others from April 2021, try out The 2021 Salary Calculator by choosing the “2021/22” tax year from the drop-down box.

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Job Support Scheme

by Admin

As I mentioned in an earlier post, the Pro-Rata Calculator had the details of the Job Support Scheme added to it. This scheme was meant to come in to effect on 1st November but at the last minute it was put on hold and the Furlough scheme was extended. At the time, I left the Job Support Scheme on the calculator in case it might be useful for people to see what the effect of it might be in the future. However, it is uncertain whether this scheme (in its current form) will ever return – so I have removed it from the calculator in order not to add confusion. The Furlough calculator is still available.

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Updates to Job Support Scheme

by Admin

In light of the current situation with Covid-19, Chancellor Rishi Sunak has made a few changes to the Job Support Scheme, so the government is providing more support than they originally planned.

The minimum number of hours which have to be worked to qualify for the scheme has been reduced from 33% of normal hours to 20% of normal hours. The employer’s contribution has been reduced from 33% of the unworked hours to 5% of the unworked hours, and the government contribution has been increased to 62% of the unworked hours (from 33%). This more generous scheme makes a huge difference to small businesses who were worried they would be unable to meet the costs from 1st November. However, it does reduce the minimum amount an employee can be paid from 77% to 73% of their full salary (this is only the case if the number of hours worked is below 33%).

The Salary Calculator’s furlough calculator has been updated with these latest figures.

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