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How do payslips work? ๐Ÿงพ

how do payslips work

How do payslips work?

Introduction ๐Ÿ‘‹

Getting a job is really exciting.

I mean, who doesn’t love getting paid? ๐Ÿ’ธ

BUT getting paid can be a bit confusing – when payday comes around, you get sent a payslip. ๐Ÿ“จ

Payslips are really important, but nobody explains what they’re for! ๐Ÿคทโ€โ™€๏ธ

All the information on a payslip can be really confusing – especially if nobody has shown them to you before. ๐Ÿฅด

See below for our ultimate guide to understanding payslips! ๐Ÿ“ƒ

Disclaimer: This website provides information for guidance and educational purposes only. The Grown-Up School does not provide regulated financial advice. You can seek independent financial advice from a suitably qualified and regulated professional advisor. Check out our disclaimer policy for more information.

What are payslips? ๐Ÿคทโ€โ™€๏ธ

Payslips are documents that tell you how much you’re getting paid.

If you have a job with an employer, every time they pay you, you’ll be given a payslip.

Payslips are usually sent on a piece of paper or a digital document. ๐Ÿ“ƒ

Your payslip can tell you how much money you’re:

  • Getting paid from your employer ๐Ÿ’ฐ
  • Paying to the government in tax (What is tax? ๐Ÿ’ธ) ๐Ÿ›๏ธ
  • Putting towards your pension (money to look after you when you’re older) ๐Ÿง“
  • Paying off your student loan (if you’ve borrowed money for education)๐ŸŽ“
  • Being given as sick pay (if you’ve been sick) ๐Ÿค’
  • Being given as maternity/paternity/adoption pay (if you’ve become a parent) ๐Ÿผ
  • Paying towards court payments/child maintenance (if you’ve received court fines or you have to pay towards your children) ๐Ÿ‘ฉโ€โš–๏ธ

They can look a bit like this! โฌ‡๏ธ

What information is included on a payslip? (UK) โœจ

Tax ๐Ÿ›๏ธ

What is tax? ๐Ÿ’ธ

Tax is money that people and businesses have to pay to the government.

People pay money to the government in order to get services like police stations, fire and rescue services, and schools.

Tax is mandatory so people living in a country have to pay it โ€“ otherwise they could get into a lot of trouble! ๐Ÿ‘ฉโ€โš–๏ธ

National insurance (NI) โ›‘๏ธ

National insurance is a type of tax you pay so that you can get paid money back from the government in difficult situations.

For example, national insurance helps to pay for things like:

  • Sick pay ๐Ÿค’
  • Unemployment pay – if you’ve lost your job or aren’t working ๐Ÿ’ผ
  • State pension – when you get old and can’t work any more ๐Ÿง“
  • Maternity pay – if you’ve become a parent ๐Ÿ‘ถ

Every person also gets a national insurance number to help them to pay their tax. ๐Ÿ’ณ

State pension ๐Ÿง“

In the UK you can get “state pension” from the government. ๐Ÿ’ธ

This is money that you can claim from the government at “pension age” (66-68 years old depending on when you were born). ๐Ÿง“

You get this money after paying “national insurance tax” to the government when you work. ๐Ÿ’ผ

You need to pay towards “national insurance” for 35 years to get the full state pension money from the government. ๐Ÿ—๏ธ

In 2021/22 people can get up to ยฃ179.60 per week as their state pension.

For a lot of people this isn’t enough money to comfortably live off when they retire, which is why they invest in pension schemes/workplace pensions.

Why you should save for retirement when youโ€™re really young ๐Ÿง“

National insurance number (NI number) ๐Ÿ’ณ

Just before you turn 16, people in the UK are sent a national insurance ID number in the post. ๐Ÿ“ฌ

Your national insurance number never changes. ๐Ÿ—‚๏ธ

They’re made up of a weird combination of letters and numbers e.g. AA123456C.

It’s important to keep your national insurance number safe and handy, because every job that you get will want to know what your national insurance number is. ๐Ÿง

Income Tax (PAYE – Pay As You Earn) ๐Ÿ˜ด

What is income tax? ๐Ÿ’ธ

Are you a lazy person? ๐Ÿฆฅ

Great!

You’ll love PAYE (pay as you earn)! – It basically means that your employer:

  • does all the maths for you
  • calculates your income tax for you
  • sends your income tax payments to the government for you

Income tax is money that people have to pay to the government.

When you make money, you have to pay part of the money you make to the government. There are lots of different rules about how much money you need to pay.

If you donโ€™t pay your tax on time, you could get fined and have to pay more money. The government will usually help you to pay your tax.

People have to pay income tax on money they make from things like:

  • Their jobs
  • Renting out their house
  • Selling things online
  • Having a savings account
  • Owning their own business

In the UK, income tax helps to pay for things like:

  • Free healthcare ๐Ÿง‘โ€โš•๏ธ
  • Police ๐Ÿ‘ฎ
  • Schools ๐Ÿง‘โ€๐Ÿซ
  • Fire services ๐Ÿ‘ฉโ€๐Ÿš’
  • Roads ๐Ÿ›ฃ๏ธ
  • Railways ๐Ÿš„
  • Housing ๐Ÿ˜๏ธ

Tax code ๐Ÿค“

Your tax code decides how much income tax you pay.

For example, in the UK if your tax code is 1257L – this means that you can earn ยฃ12,570 before you have to start paying income tax.

Anything you earn over the ยฃ12,570 will be charged tax.

Workplace Pension ๐Ÿง“

Workplace pensions are money that you save towards retirement (when you stop working when you’re older).

Pension schemes are a type of long-term savings plan. ๐Ÿท

You save some of your pay regularly whilst you’re working. ๐ŸŒฑ

This gives you money to live off in later life, when you want to work less or retire. ๐ŸŒณ

There are different types of pension schemes

Some might be set up by your employer, others you can set up by yourself. ๐Ÿ™‹โ€โ™€๏ธ

If your employer sets up a pension for you this is called a workplace pension. ๐Ÿ’ผ

A lot of workplaces offer free pension contributions, depending how much you put in. ๐Ÿ’ธ

For example, if you pay 8% of your salary into your pension savings, your employer might double that, meaning every year an amount equal to 16% of your salary is going towards retirement. ๐Ÿ’ธ๐Ÿ’ธ๐Ÿ’ธ

How cool is that? ๐Ÿ˜ฒ

That could be a crazy amount of free money from your employer, which might grow over time with your pension investments ๐Ÿค‘๐Ÿชด

Why you should save for retirement when youโ€™re really young ๐Ÿง“

Student Loans ๐ŸŽ“

If you borrow money to go to university to study, you often pay it back through your payslips. ๐Ÿ“ƒ

You usually can’t choose how much you pay back, which is different to normal loans like credit cards, where you can choose how much you pay back every month. ๐Ÿ“†

Gross pay ๐Ÿ’ฐ

Gross pay is a bit annoying – it’ll probably make you a bit sad when you first see it!

This is because your gross pay is how much you would get paid IF you didn’t have to pay tax, pension and a ton of other deductions! ๐Ÿ˜ข

Your gross pay, is your pay before things like tax and pension get taken away. ๐Ÿ’ธ

Net pay ๐Ÿฅ…

This is the best part of your payslip! ๐ŸŽ‰

Your net pay is how much you’re getting paid.

It tells you how much money should be sent to your bank account! ๐Ÿ’ธ

Your net pay is how much you’re getting paid, after things like your tax and pension get taken away. ๐Ÿ’ณ

What can I use my payslips for? ๐Ÿคทโ€โ™€๏ธ

You can use your payslips for things like:

  • Checking how much you’re getting paid ๐Ÿ‘€
  • Making sure that your employer has paid you the right amount, and paid the right amount of tax to the government for you๐Ÿ’ธ
  • Proving your address ๐Ÿก
  • Proving you have a job (e.g. if you’re renting a home What is renting? ๐Ÿ ) ๐Ÿ’ผ
  • Applying for loans (to prove how much money you’re earning – particularly for buying a home with a mortgage loan What is a mortgage? ๐Ÿก) ๐Ÿ’ณ
  • Proving to the government how much money you’re earning, and how much tax you’ve paid them ๐Ÿ›๏ธ
  • Proving to your pension provider how much you’ve paid towards your pension ๐Ÿง“

What you should do with your payslips ๐Ÿ•ต๏ธ

1. Check all the information is right ๐Ÿ”

It’s really important to make sure that everything on your payslip is right, because you need your payslips to prove things!

You should check everything on your payslip, including things like:

  • Your name
  • Address
  • National insurance number
  • Pension payments
  • Student loan payments
  • National insurance payments
  • Income tax (PAYE – Pay As You Earn) payments

Most importantly, check your tax code!!

Check your tax code!! ๐Ÿ‘€

Your tax code decides how much income tax you pay.

If your tax code is wrong, you could:

  • Pay too much income tax and be entitled to a “tax rebate”!
  • Pay too little income tax, and get a massive unexpected tax bill sent to you from the government!

What to do if your tax code is wrong (or you’re not sure if it’s right) ๐Ÿฅด

If you’re not sure what your tax code is supposed to be (or you think it’s wrong), you can:

2. Keep copies ๐Ÿ–จ๏ธ

Mistakes happen, and sometimes employers lose their copies of payslips.

It’s always good to keep copies of your payslips, just in case! ๐Ÿคž

3. Keep your payslips safe ๐Ÿ”

Payslips contain A LOT of your precious personal information, which could easily be used to steal your identity or scam you. ๐Ÿฆน

Keep your payslips in a safe, secret place so that nobody else can access them!

35 ways to protect yourself from scammers ๐Ÿฆน

How payslips are calculated ๐Ÿค“

To calculate your payslip, your employer will follow 3 main steps:

1. Work out your gross annual/monthly pay ๐Ÿ’ฐ

To work out your gross monthly pay, you:

  • Take your agreed yearly pay and divide it by 12 (because there are 12 months in the year!)

For example, if your “gross pay” each year was” ยฃ17,284:

ยฃ17,284 / 12 = ยฃ1,440.33

Your gross monthly pay would be ยฃ1,440.33!

(If you’ve worked extra hours etc. this would need to be added in too!) โŒš

2. Work out how much needs to be deducted from your gross pay ๐Ÿ“‰

Next, you work out how much tax and other stuff you need to pay. ๐Ÿ˜ข

Pension ๐Ÿง“

You can usually choose what percentage you want to pay towards your pension. โš–๏ธ

A lot of people are encouraged to pay at least 5%.

To work out your monthly pension payments, you:

  • Take your agreed “gross” yearly pay (ยฃ17,284)
  • Work out your pension percentage from your yearly pay (5%) (ยฃ17,284 * 0.05 = ยฃ864.20)
  • and divide it by 12 (because there are 12 months in the year!) (ยฃ864.20 / 12 = ยฃ72.02)

Your monthly pension payments would be ยฃ72.02!

Income Tax (PAYE – Pay As You Earn) ๐Ÿ’ฐ

The UK government has different rules to decide how much income tax you need to pay.

You can check these on the government website here.

If you are earning ยฃ17,284 each year the rules could be as follows:

  • Your tax code is 1257L – which means you can earn ยฃ12,570 before you pay income tax. ยฃ12,570 is your “tax free allowance”.
  • Anything over ยฃ12,570, you have to pay an income tax charge of 20% on.

To work out your monthly income tax payments, you:

  • Get your agreed “gross” yearly pay (ยฃ17,284)
  • Take away your yearly pension payments which we just calculated above โฌ†๏ธ (because you don’t have to pay tax on these – yay!) (ยฃ17,284 – ยฃ864.20 = ยฃ16,420.80)
  • Take away your “tax free allowance” (ยฃ16,420.80 – ยฃ12,570 = ยฃ3,849.80)
  • This will tell you how much you have earned over the “tax free allowance” (ยฃ3,849.80)
  • Charge your “money left to tax” the income tax rate e.g. 20% (ยฃ3,849.80 * 0.20 = ยฃ769.96)
  • You’re now left with how much tax you have to pay each year (ยฃ769.96)
  • To work out your monthly payments divide your yearly payments by 12 (because there are 12 months in the year!) (ยฃ769.96 / 12 = ยฃ64.16)

Your monthly income tax payments would be ยฃ64.16!

National Insurance (NI) โ›‘๏ธ

The UK government has different rules to decide how much national insurance you need to pay.

You can check these on the government website here.

If you are earning ยฃ17,284 each year the rules could be as follows:

  • You can earn ยฃ12,570 before you pay national insurance.
  • Your “tax free” amount is ยฃ12,570.
  • Anything over ยฃ12,570, you have to pay a national insurance charge of 13.25% on.

To work out your monthly national insurance payments, you:

  • Get your agreed “gross” yearly pay (ยฃ17,284)
  • Take away the “tax free” amount (ยฃ17,284- ยฃ12,570 = ยฃ4,714.00)
  • This will tell you how much you have earned over the “tax free” amount (ยฃ4,714.00)
  • Charge your “money left to tax” the national insurance tax rate e.g. 13.25% (ยฃ4,714.00 * 0.1325 = ยฃ624.61)
  • You’re now left with how much tax you have to pay each year (ยฃ624.61)
  • To work out your monthly payments divide your yearly payments by 12 (because there are 12 months in the year!) (ยฃ624.61 / 12 = ยฃ52.05)

Your monthly national insurance payments would be ยฃ52.05!

3. Calculate net pay ๐Ÿฅ…

Now that you know how much you:

  • Earn in “gross pay” before deductions
  • How much you need to pay in deductions (tax, pension, student loan payments)

It’s time to work out how much money you’re going to be left with! (Your net pay!)

To your monthly net pay (how much you’re taking home – yay!), you:

  • Take your gross monthly pay (ยฃ1,440.33)
  • Take away your monthly deductions e.g. pensions, income tax, and national insurance ( ยฃ1,440.33 – ยฃ72.02 (pension) – ยฃ64.16 (income tax) – ยฃ52.05 (national insurance) = ยฃ1,252.10)

Your monthly net pay would be ยฃ1,252.10!

This means that your employer would send ยฃ1,252.10 to your bank account on payday. ๐ŸŽ‰

What if I’m self-employed? ๐Ÿ‘ทโ€โ™€๏ธ

If you work for yourself, or own your own business, you’re considered “self-employed”.

Self-employed people:

  • Get paid by their customers ๐Ÿ’ธ
  • Don’t get payslips
  • Have to be SUPER organised and pay their income tax and national insurance tax themselves ๐Ÿ—ƒ๏ธ
  • Have to complete a form/questionnaire called a “tax return” every year, to pay their taxes ๐Ÿ“ƒ
  • Need to be very careful with their money, and set money aside to pay their tax bills
  • Can hire an accountant to help handle their taxes if they want to make life easier ๐Ÿฆฅ What is an accountant? ๐Ÿ‘ฉโ€๐Ÿ’ผ

Conclusion ๐Ÿ‘

So that’s it!

Payslips are documents that tell you how much you’re getting paid.

You can use payslips for lots of things, like proving how much money you earn and where you live.

You should:

  • Keep your payslips safe ๐Ÿ”
  • Make sure that your payslips are accurate ๐Ÿ”
  • Keep copies of your payslips ๐Ÿ–จ๏ธ

If you know any friends or family members who might benefit from learning about payslips share this post with them!

Finally, don’t forget to check out our similar articles below!

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How to be persuasive๐Ÿ˜

What to wear for an interview ๐Ÿ‘•

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