| Income tax is deducted by an employer from | | | | employer under the tax inland revenue PAYE |
| the gross salary of an employee according to | | | | scheme other income is also taxable and |
| the inland revenue tax percentage applicable | | | | declared on the annual tax income returns. |
| to those earnings taking into account | | | | Items declared on the income returns would |
| personal tax allowances and reliefs | | | | include income from savings, dividend income, |
| available. Income Tax percentage rates for | | | | pension and trust income, any rental income |
| Employees All employers in the UK pay | | | | and self employed earnings. Working tax |
| employees through the inland revenue tax PAYE | | | | credits are not classed as taxable income. |
| system and are required to deduct both tax on | | | | Determining how much is tax on income from |
| income and national insurance contributions | | | | savings is achieved by applying the income |
| from the gross wages. The net wages received | | | | tax percentage applicable after deducting |
| are by the employee after the PAYE | | | | gross earnings from the tax inland revenue |
| deductions. Gross pay is the total amount the | | | | threshold limits. If non savings income is |
| employee has earned in that pay period | | | | less than the £2320 starting rate for |
| including the basic wages plus any tips or | | | | savings or if savings and dividend income is |
| bonuses received but excluding non taxable | | | | the only source of income then the savings |
| expenses. The gross pay on which an employee | | | | income tax percentage is 10 per cent up to |
| is assessed from tax and national insurance | | | | the £2,320. If non savings income is |
| includes taxable benefits received by that | | | | above the starting rate then all of savings |
| employee such as private medical care or the | | | | are taxed at the 20 per cent basic rate. When |
| provision of a company car. Non taxable | | | | earnings exceed the higher tax threshold of |
| expenses being business expenses the employee | | | | £34,800 the income tax percentage on |
| has incurred carrying out the duties which | | | | savings increases from 20 per cent to 40 per |
| are reimbursed by the employer. Having | | | | cent and on dividends from 10 per cent to |
| established the total gross pay the employer | | | | 32.5 per cent. In effect how much is tax is |
| calculates how much is tax on income and | | | | determined by the highest tax percentage |
| deducts tax on a cumulative basis taking into | | | | applicable to income. National Insurance for |
| account the employee personal allowance | | | | Employees While tax on income is calculated |
| indicated by the tax code. Business expenses | | | | on a cumulative basis national insurance |
| incurred by an employee which are not | | | | contributions are calculated as a percentage |
| reimbursed by an employer may be claimed as a | | | | of gross salary in a specific pay period |
| tax relief. Such items might include the | | | | under the tax inland revenue system. |
| difference between the UK allowance on | | | | Employees under the age of 16 or over the |
| mileage of 40p per mile and the amount paid | | | | national pension age of 65 do not pay |
| by an employer is less than 40p and also | | | | national insurance, they are exempt. There |
| working from home expenses. The tax code | | | | are other circumstances where an employee |
| tells the employer how much is the UK | | | | pays a different rate of national insurance. |
| allowance to free pay the employee is | | | | For example a married woman who is widowed |
| entitled to in the financial year. For | | | | and possess a certificate may pay national |
| example a 2008 tax code of 603L would | | | | contributions at the rate of 4.85 per cent of |
| indicate annual tax free earnings of | | | | gross wages on earnings above the primary |
| £6,035. That does not mean the employee | | | | starting threshold. Employees with a second |
| will not be deducted tax until earnings reach | | | | job where the earnings are above the upper |
| that figure as when calculating the tax on | | | | earnings threshold would only pay 1 per cent |
| income the employer is required to spread the | | | | insurance. For most people who are employed |
| tax free allowance evenly over the pay | | | | the national insurance contribution is |
| periods. On earnings above the tax free | | | | according to the rates set in table a and the |
| allowance the 2008 tax percentage is 20 per | | | | amount payable is 11 per cent of gross |
| cent up to what is known as the higher | | | | earnings about the primary threshold and on |
| earnings threshold which under 2008 tax rules | | | | all earnings up to the upper earnings |
| is £34,800 per annum. Gross salary which | | | | threshold from which point the percentage |
| is above the higher earnings threshold is | | | | drops to 1 per cent. In 2008-09 the primary |
| subject to a 2008 tax rate of 40 per cent. In | | | | threshold is £105 per week. |
| addition to the tax on income deducted by an | | | | |