How Much Tax do I Have to Pay?

In a life full of financial uncertainties, there is one thing that you can cling to as an absolute fact: the taxman will always be trying to take money off you. How much tax you have to pay, however, is dependant on a number of different factors.

National Insurance

In the first instance, it is important to recognise that there are two distinct payments which you will normally be required to make to the government. The first is National Insurance.

These are contributions that individuals make to the public purse, in order to guarantee their right to state-run welfare facilities. National Insurance is different from general taxation in several key ways: primarily, although levels of contribution are staggered, the access to benefits is not means tested. Furthermore, employers also make a contribution for each of their employees, based on the size of contribution being paid by the latter.

National Insurance contributions are divided into Classes, ranging from Class 1 to Class 4. If you are an employed person, you are likely to be required to make Class 1 contributions. This means that, if your gross wage is over the Earnings Threshold, currently set at £97 per week, you will pay 11% of your income in National Insurance Contributions, or NICs. Furthermore, if you earn over £645 per week, you will pay another 1% of everything you earn over that figure. As an employed person, it is the responsibility of your employer to pay your contributions out of your wage.

For the Self-Employed

If you are self-employed, the National Insurance system is slightly different. In this case, regardless of your income, you will pay Class 2 NICs at a flat rate of £2.10 per week. On top of this, you will be required to make Class 4 contributions of 8% of your income between £5,035 and £33,540. On earnings over this higher figure, you should be making contributions of 1%. You should also bear in mind that, if your income is less than £4,465, you can apply for a Small Earnings Exception, which exempts you from Class 2 contributions.

Income Tax

Aside from National Insurance, you will also pay income tax. Everyone has an annual non-taxable allowance of £5,035, although this may be larger if, for example, you are over 65. If you are employed, then you will pay tax on earnings over this allowance as follows: 20% up to £2,150, 22% between £2,151 and £33,300, and 40% on everything above £33,301. Your income tax will be automatically deducted from your wage if you are signed up to a PAYE scheme.

If you are self-employed, the income tax system operates slightly differently. In these cases, you will be required to fill in a Self Assessment, which involves giving details of all of your taxable earnings from the previous year. From this, HM Revenues and Customs will calculate how much tax you must pay. You will pay tax at the same rate as employed people; the difference is that your payments are not deducted as you earn.