How are wages paid
If you are employed by someone to do a job, you get money in exchange for the work you do. This money is called a wage or a salary and is usually paid to you monthly or weekly. Most of the time the money is paid directly into your bank account but sometimes you can get paid by cheque or in cash.
The difference between gross and net wages
We don’t get to take home all of the money we earn. This is because we have to pay some of it in tax, which is the name given to the money that the Government takes from us to run the country. See our section on Tax for more information. Some of our earnings may also go into a pension or savings scheme or as union fees before we get paid.
The amount of money we earn before any deductions are made is called our gross wage while the money we actually get paid is called our net wage. People often refer to net wages as ‘take home pay’.
Below, we look more closely at deductions from wages as well as extra money or tax credits that you may receive.
Deductions for tax and national insurance
Most of us have Income Tax and National Insurance deducted from our wages.
- Our Income Tax goes to the Government and helps pay for everything from building roads and maintaining law and order to funding our health service. You have to pay this tax even if you don’t agree with what the Government is doing and the amount you pay depends on how much you earn. To find out more, see our page about Income Tax .
- National Insurance is taken from our wages and goes into the National Insurance fund. This pays for things like Job Seeker’s Allowance, Incapacity Benefit, Retirement Pensions, and Maternity Allowance. By paying into the fund, we build up an entitlement to claim certain benefits. See National Insurance for more information.
Pensions and union fees
Sometimes money is also taken away to pay for a pension or for membership of a trade union. You should have a choice about this. if you are asked to say how much you are paid, for example when applying for benefits, you should make it clear if extra money
is being taken away.
If you have paid too much tax you may get a tax refund. You may also get a bonus or extra money for overtime.
Deductions for debts
Your employer should also give you a pay slip. Pay slips can look very different to each other but should show any money that has been taken off or added on to your pay. Keep your pay slips safe – you will need them to claim certain benefits as well as to see if you have been paid the right amount.
Activity: Understanding your pay slip - you can move over it for a description of each item of importance.
Working out tax
Nearly everyone is allowed to earn a certain amount of money before they have to pay tax. This amount is called a personal tax allowance.
The personal allowance for a person under 65 is currently £6,475.
The allowances change every year. The change is announced in the budget.
People over 65, those who are married and were born before 1935, and people registered blind may have different personal allowances. Click here for further information - IncomeTax
To help you understand how tax is worked out look at this example.
1) Take your personal allowance away from your gross wage
Example – Mr Dhesi earns £17,950 before tax.
Mr Dhesi has to pay tax on £11,475 of his wage.
The amount of tax you pay goes up the more you earn. These different tax amounts are called bands.
- Between £0 and £37,400 over your allowance you pay 20% tax. For above £37,400 over your allowance you pay 40% tax. Above £150,000 you pay 50%.
2) Calculating tax
Mr Dhesi pays £2,295.00 in tax.
Activity: Try working these out for yourself.
Using £6,475 as the personal allowance, how much tax should these people pay?
Now try it with your earnings - remember to use our pop-up calculator if you need some help with the maths! Remember, it's at the top of every page if you ever need a handy calculator.
A word about Benefits when you’re working
If you are having problems with any employment issue, contact an advice centre such as a Citizens Advice Bureau. They will be able to help, or will put you in touch with a specialist who can.Source: www.moneymatterstome.co.uk