Understanding Your Payslip

Your payslip reveals important information about what you contribute to government expenditure; but what exactly do those Income Tax and National Insurance figures mean?

The Payslip Puzzle

We count down the days until they arrive, plan how we are going to spend them and how long we need to make them last, but when your payslip arrives do you really have a clue what you are looking at?

We puzzle over the contents and (if you’re like most of us) always end up feeling somewhat embarrassed at how little we understand all the figures; PAYE, tax, National Insurance and student loan repayments. The big problem with not understanding is that, you could, month-in month-out, be staring at a maze of numbers without knowing there was a mistake! You could be paying too much Income Tax or pension contributions for example.

No one wants to pay more money than they have to, that would just be silly. So grab a cup of tea and take a few minutes to learn what all the different deductions mean, where they go and why you are paying them. Then every month, from now on, you can be confident that you know exactly what you are looking at; it might still not make for cheerful reading, but you should feel a bit better knowing you understand it.

How Do I Pay Income Tax and National Insurance?

If you are employed, you pay it through a system called Pay As You Earn (PAYE) which is used to collect your Income Tax and National Insurance contributions. Your employer deducts these contributions from your wages and pension.

You pay tax and NI throughout the whole year, every single time you are paid, instead of in one lump sum. Then, at the end of the year you will get something called a P60 which details the total amounts paid to you, as well as deducted from you, like a receipt.

If you are self-employed, you will be asked to take part in self-assessment and pay the amounts you owe directly. For more information see www.hmrc.gov.uk

Where Does All My Money Go?

Most of us (go on, admit it) will go through life, never quite knowing exactly where all our hard-earned cash ends up. But to offer a very brief explanation, the money from our Income Tax and National Insurance contributions both go straight into central government. It is a common misconception that National Insurance pays exclusively for our pensions and health, when in actual fact it all goes into the same pot for government expenditure.

We essentially get our taxes back in the form of government spending. This covers numerous key features of our everyday life including the environment, our streets, order and safety, running government, defence, health, helping others, culture, education, running the country and social systems.

Public spending however, is largely dominated by the following three areas: social security, health, and education. This includes anything from pensions and Winter Fuel Allowance for pensioners, to housing benefits, waste disposal, the upkeep of local parks, immigration and border control, police and fire departments and schools.

If you want to know in more detail, exactly where your tax goes each day check this out.