HOW TO UNDERSTAND A PAYSLIP
For anyone who works in the hospitality industry, understanding payslips can feel like a minefield. Even for someone on a regular salary with regular hours – perhaps working in Head Office – the tax codes and deductions are confusing and impenetrable. But what if you’re on an hourly wage, with varying shifts and then service charge on top? Things can get really complicated.
This lack of understanding and complex wage splits can create real upset and mistrust. There can be tension between management and employees, or suspicion about underpayment. This can only worsen if line managers are unable to explain to concerned or curious employees what is actually signified by the numbers, codes and terminologies that they’re seeing.
So whether you’re the person that people come to with pay slip questions every month, or whether you’re the person who’s asking the questions each time payday comes around, we’ve teamed up with Electric Mayonnaise who have put together this handy guide to help you to demystify your own pay slip, or empower you with the knowledge to explain to others.
We will be creating staffroom posters on this topic as a handy reference for your teams – if you would like to register your interest please send us an email here – and why not let us know what other reference guides you’d find valuable? We’d love to hear.
Most people pay income tax and national insurance through PAYE, which means Pay As You Earn, and that figure is automatically deducted from your payslip. As an employee, you will have a PAYE reference number and pay through your employer’s payroll. On top of this there is also an employer’s contribution: your employer will pay additional national insurance and tax on top of your gross salary for having you as an employee on their payroll. This could be up to 13.8% in total.
Your employer will pay all of it for you to HMRC (employee and employer combined).
Most people receive a tax free personal allowance at the beginning of the tax year. This is generally £12,570 per year, hence the standard tax code which is 1257L. The figure could be different for a number of reasons – if you receive certain benefits or allowances then it will be more, or if you have under-paid your tax for the previous year then it will be less. Over and above that amount, employees will pay tax in bands, as follows:
||Up to £12,570
||£12,571 to £50,270
||£50,271 to £125,140
You start paying National Insurance when you earn more than £242 a week (2023/24).
The National Insurance rate you pay depends on how much you earn, and is made up of:
- 12% of your weekly earnings between £242 and £967 (2023/24)
- 2% of your weekly earnings above £967.
For example, if you earn £1,000 a week, you pay:
- nothing on the first £242
- 12% (£93.24) on the next £777
- 2% (£0.66) on the next £33.
As an employee, your National Insurance contributions stop when you reach State Pension age.
National Insurance is used by the government for paying social benefits like maternity, paternity, child benefits, disability allowance and the state pension. A small amount is also attributed to the NHS.
So if you are earning less than £50,000.00 per annum, your total tax and NI will be around 33% which is around 20% of tax and 13% of national insurance. Here’s a great website for working out your take home pay:
At this point, it is possibly a good idea to explain that TRONC is exempt from NI contributions. This means that if you are paid a salary made up of basic house pay and TRONC, you will not pay the 12 – 14% NI contributions on the amount that is made up of TRONC. This is both a positive (because your take home pay is more) but also a negative because you will not be paying your full national insurance contribution. It is also important to note that your pension contributions will be based on your house pay or basic and not on the combined amount, so if you are keen on saving for your pension, be sure to increase your contribution to compensate for the TRONC contribution.
What do the Letters on my Tax Code mean:
Letters in your tax code refer to your situation and how it affects your Personal Allowance.
||What they mean
||You’re entitled to the standard tax-free Personal Allowance (£12,570 normally)
||Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance
||Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner
||Your tax code includes other calculations to work out your Personal Allowance
||Your Personal Allowance has been used up, or you’ve started a new job and your employer does not have the details they need to give you a tax code
||All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension as the personal allowance may be reflected in the payslip of your other job)
If you’re on an emergency tax code your payslip will show:
- 1257L W1
- 1257L M1
- 1257L X
These mean you’ll pay tax on all your income above the basic Personal Allowance (£12,570) – which means that you’re likely to be paying more than you should. Normally, this will correct itself automatically, once HMRC receives your correct tax code, the following pay period you will see a tax credit (your tax will be lower or show a negative amount and your net pay will be higher). This is how these are generally corrected.
You may be put on an emergency tax code if HMRC does not receive your income details in time, after a change in circumstances such as:
- a new job
- working for an employer after being self-employed
- getting company benefits or the State Pension
Emergency tax codes are temporary. HMRC will usually update your tax code when you or your employer give them your correct details. If your change in circumstances means you have not paid the right amount of tax, you’ll stay on the emergency tax code until you’ve paid the correct tax for the year – for example, if you had paid no tax last year and you should have, it might be that HMRC will keep you on an emergency tax code (paying more tax) until you have recouped the tax from last year; at that point they would change your tax code. This is highly unusual.
You should make sure you have given your employer your P45 from your last job, or completed a starter checklist, ticking the box that most applies to your circumstances. This should reduce the likelihood or time that you remain on an emergency code.
What if my tax code starts with a different number:
If HMRC has calculated that you have paid more or less tax in a previous year, you might have a different number, for example, you paid £6000.00 less tax last year than you should have.
Your tax code might look something like this:
£12,570.00 – £6000.00 = £6570.00
If you have paid more tax, then HMRC will usually send you a cheque or deposit the money straight into your bank account if you have an online account with HMRC. They don’t like to carry over credit into the new financial year.
Some other useful terminology and things to look at on your payslips:
Gross Pay: Your salary before you have paid national insurance and tax
Net Pay or Take Home Pay: Your salary after you have paid national insurance and tax and what will end up in your bank account
Your Rate of Pay: What you are paid per hour
Your pension contribution: Currently, legislation requires a minimum of 8% of your salary contributed to your pension. This is made up of 5% from you, and 3% from your employer. You are able to opt out of your pension contributions if you choose to
How you can find your tax code and check your personal allowance:
- on your payslip
- on a ‘Tax Code Notice’ letter from HMRC if you get one, this is usually issued once a year towards the end of February or March
- register for an online account with HMRC, this is generally for people who are self-employed and have to complete a self-assessment but there is nothing stopping you from creating one to check your tax code – https://www.gov.uk/check-income-tax-current-year
- download the app (they are getting with the times) – https://www.gov.uk/guidance/download-the-hmrc-app
- contact HMRC by phone, definitely the most difficult option as it is very difficult to speak to anyone – 0300 200 3300
We’ve put together a handy infographic to help you or your team understand each section. It’s worth noting that if they were being paid 100% out of house pay with no Tronc, and they had a normal tax code (1275L), they would be paying £440.50 in tax and £264.30 in NI. Their take home pay would be £2535.03. So, in their case, being paid in Tronc means that they are paying less NI and therefore will be net better off.