Topic 3: Documentation for pay and pay calculations ifs Certificate in Personal Finance (CPF5)

Checklist for Topic 3 By the end of this topic, you will be able to: Define ‘pay as you earn’ (PAYE); Understand a payslip, including: - National Insurance (NI); - income tax and tax codes; and - personal allowance; Explain and calculate gross pay, net pay and deductions; Work out pay, including tax; Explain sick pay; Explain the arrangements for repayment of a student loan; Explain the National Minimum Wage Explain how tax is calculate for the self-employed (that is self assessment) including: - what a ‘tax return’ is; and - what a ‘self assessment’ is; and Explain the two tax documents – P45 and P60 ifs Certificate in Personal Finance (CPF5)

Earnings What are earnings? Earnings – the money received for completing a job. Earnings are called ‘wages’ or ‘salary’ What’s the difference? Wages usually refers to an hourly amount. Salary usually refers to an annual amount (per annum – p.a.) ifs Certificate in Personal Finance (CPF5)

Activity 3a Consider the following people. a)Ali delivers newspaper for The Corner Shop and earns £3 an hour. He also gets £5 each week for pocket money. b)Bethany babysits for her neighbours and earns £3.40 an hour. She also gets an allowance from her grandma of £40 each month. c)Connor works in a sports shop called Jump on Saturdays and earns £4.85 an hour. He also helps his father at his shop for an hour each day after college for £20 a week. ifs Certificate in Personal Finance (CPF5)

Activity 3a continued d)Demi is a receptionist at Dolby and Crane Ltd earning £18,000 a year. Before that, she was unemployed and received a government benefit that paid her £56.81 per week. e)Evan is a painter/decorator who works for himself (that is, he is ‘self-employed’). He charges £200 per day. He also works as a DJ at a club on Saturdays and at weddings, for which he charges £100 a time. Q. Which one is earning a salary? Demi is earning a salary, because her pay is stated as being ‘£18,000 a year’. ifs Certificate in Personal Finance (CPF5)

Gross Pay & Net Pay Everyone pays part of their earnings to the Government. These payments are called deductions. These payment come in the form of: ◦ Tax; and ◦ National Insurance (NI) Gross Pay – earnings before deductions Net Pay ( “take home pay” ) – earnings after deductions. ifs Certificate in Personal Finance (CPF5)

Activity 3b a)Jimmy has gross monthly pay of £1,100 and total deductions of £ How much will be paid into his bank account this month? Jimmy will have £ paid into his bank account. £1,100 - £ = £ b)Lizzie has gross monthly pay of £980. She has to pay income tax of £29.33 and NICs of £ How much is her net pay? Lizzie’s net pay is: £980 - £ £38.04 = £ ifs Certificate in Personal Finance (CPF5)

Pay as you earn (PAYE) PAYE is the way most people pay tax to the Government. Employers collect it from their employees gross pay and pass it to the Government. ifs Certificate in Personal Finance (CPF5)

Payslips Employers are required to provide employees with a payslip. It is usually marked “Private and Confidential” It details ◦ Gross Pay ◦ Deductions with reasons ◦ Net Pay ◦ Payment Method ifs Certificate in Personal Finance (CPF5)

Activity 3c How much money will Demi be paid on 1 June 201X? On 1 June 201X, Demi will be paid £1, ifs Certificate in Personal Finance (CPF5)

National Insurance (NI) Employees pay NI as well as tax. It is used to fund: - State Pensions; - Jobseeker’s Allowance, etc. The amount paid depends on: - How much you earn; and - If you are Employed or Self-Employed ifs Certificate in Personal Finance (CPF5)

National Insurance Number This is your own personal account number with the Government. Used to record tax and NI contributions. Reference for Social Security system - Claiming benefits ifs Certificate in Personal Finance (CPF5)

Who do you think uses your national insurance number? You must give your NI number to - HMRC - Employer - Student Loan Company - Government Benefits Agencies - Banks ifs Certificate in Personal Finance (CPF5)

Calculating NI NI is calculated weekly. Different “classes” – depends on pay and employment status Most pay Class 1: 12% of earnings between £153 and £805 : 2% of earnings over £805. ifs Certificate in Personal Finance (CPF5)

Case Study 1 Karim is employed and earns £12,480 a year. This works out as £240 a week. He does not have to pay NI on the first £153 per week. Calculate Karim’s weekly NI contribution. So, £240 - £153= £87 Karim has to pay: 12% x £87 = £10.44 per week. ifs Certificate in Personal Finance (CPF5)

Case Study 2 Mark is also employed. He earns £52,000 a year. This works out at £1,000 per week. He does not have to pay NI on the first £153. Calculate Mark’s weekly NI contribution. So, Mark has to pay 12% on earnings between £153 a week and £805 per week. £805 - £153 = £652 12% x £652 = £78.24 ifs Certificate in Personal Finance (CPF5)

Case Study 2 continued He also has to pay 2% on earnings between £805 a week and £1,000 per week. £1,000- £805 = £195 2% of £195 = £3.90 So Mark has to pay: £ £3.90 = £82.14 per week ifs Certificate in Personal Finance (CPF5)

Did you know? Part-time workers can sometimes have a surprise, because they may get a deduction for NI in a week during which they have done some extra hours. As a consequence, the extra bit of work does not pay as much as they thought. ifs Certificate in Personal Finance (CPF5)

Case Study 3 Priya has a part-time job of ten hours a week at £8 per hour. Does Priya pay NI? Her usual pay is £80 and so she does not pay NI. One week she worked full-time to cover for a sick colleague. She worked 35 hours that week. Calculate her net pay for this week. Priya’s gross pay for this week was £280. The pay office deducted £15.24 in NICs and so her net pay was: £280 - £15.24 = £ ifs Certificate in Personal Finance (CPF5)

Income Tax and Tax Codes Earnings are taxable Tax is paid to Her Majesty’s Revenue and Customs (HMRC). Each taxpayer receives a personal allowance ◦ This is the amount they can earn tax-free. ◦ For the basic allowance for adults is £10,000. ◦ Those born between 6 April 1938 and 5 April 1948 are allowed an allowance of £10,500 and those born before 6 April 1938 are allowed an allowance of £10,660. Note: income tax is due only on income that is above your tax-free allowance. ifs Certificate in Personal Finance (CPF5)

Case Study 4 Demi earns £18,000 a year. Her personal allowance is £10,000. What is her taxable pay? Demi’s taxable pay is: £18,000 - £10,000 = £8,000. ifs Certificate in Personal Finance (CPF5)

Activity 3d a)Alfie’s personal allowance is £10,000 and he earns £54,000. What is his taxable pay? £54,000 - £10,000 = £44,000. b) Julia’s personal allowance is £10,500 (she was born on 2 February 1942) and her income is £13,000. What is her taxable pay? £13,000 - £10,500 = £2,500 ifs Certificate in Personal Finance (CPF5)

Tax Rate & Tax Band The actual tax paid is worked out as a percentage of taxable pay. The government calls this a ‘tax band’: for taxable income below £31,865 (in 2014/15), the rate of tax is 20% – which is the basic rate band. for taxable income between £31,866 and £150,000, the rate of tax is 40% - which is the higher rate band; and for taxable income above £150,000, the rate of tax is 45% - which is the additional rate band. Note:- You do not pay tax at the highest rate for all of your income – only for that part of your income which is in the higher bands. ifs Certificate in Personal Finance (CPF5)

Case Study 5 Demi earns £18,000 and we worked out above that her taxable pay is £8,000. This is all in the basic rate band and so she will pay all of her tax at 20%. Calculate her tax payable for the year? Demi’s tax for the year is: 20% x £8,000 = £1,600. ifs Certificate in Personal Finance (CPF5)

Case Study 5 continued How much tax will she pay each month? Because she is paid monthly, her employer takes from her monthly pay under the PAYE scheme: £1,600 ÷ 12 = £ If you look at Demi’s pay slip, you will see that this is the amount of tax that has been deducted. ifs Certificate in Personal Finance (CPF5)

Case Study 6 Alfie earns £54,000 and we worked out above that his taxable pay is: £54,000 - £10,000 = £44,000 This income means that Alfie pays tax in both the basic rate band and the higher rate band. Calculate his tax payable each month. ifs Certificate in Personal Finance (CPF5)

Case Study 6 continued He pays tax at the basic rate on the first £31,865 of his taxable income and he pays tax at a higher rate on the rest – that is: £44,000 - £31,865 = £12,135. ifs Certificate in Personal Finance (CPF5)

Case Study 6 continued We can set the calculation out as follows. So, Alfie has paid tax at 40% on the taxable pay that is above £32,010. His tax paid each month is: £11,227 ÷ 12 = £ ifs Certificate in Personal Finance (CPF5) BandRatePay in the bandTax calculationAmount of tax Basic rate20%£31,865£31,865 x 20%£6,373 Higher rate40%£44,000 -£31,865£12,135 x 40%£4,854 Total tax£11,227

Did you know? Tax calculations are always rounded down so that no one pays more tax than they have to. ifs Certificate in Personal Finance (CPF5)

Activity 3e ifs Certificate in Personal Finance (CPF5)

Activity 3e continued ifs Certificate in Personal Finance (CPF5)

Tax Codes Employers use a Tax Code to calculate the amount of tax to deduct from pay. The tax code is made up of several numbers and letters – for example, ‘1000L’ or ‘717L’. The ‘L’ at the end tells the employer that the code includes the personal allowance. ◦ Demi’s tax code is ‘1000L’ because she has a personal allowance of £10,000. ifs Certificate in Personal Finance (CPF5)

Tax Codes When the tax code numbers are multiplied by 10, this tells the employer how much pay is tax-free and so the employer can work out the taxable pay. HMRC use tax codes to collect tax that may have been underpaid. ◦ Tax codes are adjusted to collect unpaid tax the next year. ifs Certificate in Personal Finance (CPF5)

Activity 3f Karim, who works in a gym, has a tax code of 803L. He earns £12,480 in a yea. Karim owes some tax because he had a second job last year as a casual DJ and did not pay tax on his earnings. The government found out about it and told him that he owed extra tax. The tax code has reduced the income that he can earn without paying tax. This means that he is now going to pay back the tax that he owes. ifs Certificate in Personal Finance (CPF5)

Activity 3f a) Work out Karim’s monthly gross pay. Karim earns £12,480 a year, so his monthly gross pay is: £12,480 ÷ 12 = £1,040 b) Work out his taxable pay A tax code of 803L means that Karim’s monthly allowance is £8,030 a year. So his taxable pay is: £12,480 - £8,030 = £4,450 ifs Certificate in Personal Finance (CPF5)

Activity 3f c) Work out his monthly tax. £4,450 is all in the standard rate band, so his tax is: 20% x £4,450 = £890 So, the deduction for tax each month is: £890 ÷ 12 = £74.16 ifs Certificate in Personal Finance (CPF5)

Activity 3f d) Work out his pay after tax has been deducted (that is, his net pay). Calculate this monthly. ifs Certificate in Personal Finance (CPF5) Gross Pay£1,040 Deductions£74.16 Net Pay£965.84

Activity 3g In each case, work out the: Monthly gross pay; Taxable pay; Monthly tax; and Net monthly pay a)Jenny has a tax code of 845L and earns £34,000 per annum. b)Aisha has a tax code of 786L and earns £25,000 per annum. c)Cassandra has a tax code of 680L and earns £78,000 per annum. (Remember to use the higher rate band for Cassandra). ifs Certificate in Personal Finance (CPF5)

Activity 3g continued. ifs Certificate in Personal Finance (CPF5)

Activity 3g continued. ifs Certificate in Personal Finance (CPF5)

Activity 3g continued. ifs Certificate in Personal Finance (CPF5)

Overtime The amount of time that someone works beyond normal working hours. Payment for overtime can be at a higher rate. For example, ‘time and a half’ (rate x 1.5) ‘time and a quarter’ (rate x 1.25) ‘double time’ (rate x 2) Note: some businesses will pay double if you work on a bank holiday. ifs Certificate in Personal Finance (CPF5)

Sick Pay If you are ill and cannot work, your employer may not pay you. The government will pay your sick pay, which is actually paid by your employer on behalf of the government. This is called Statutory Sick Pay (SSP). The basic principles are that SSP will be paid if you earn: are sick for at least 4 days in a row are earning at least £111 a week; and have told your employer that you are sick. Note: o You may also need to provide medical evidence from the 8 th day. o Your employer will pay SSP at the current rate of £87.55 each week. ifs Certificate in Personal Finance (CPF5)

Did you know? For many employees, their contract of employment gives them better payments than SSP. For example, teachers who have worked for more than 3 years are paid on full pay for 100 days of illness. ifs Certificate in Personal Finance (CPF5)

Student Loans Part of the financial support package that the government provides for students is student loans. People who take out this type of loan for college or university only start making repayment to the government when they begin to earn more than £21,000 a year. Their employer takes the repayments out of their wage. The amount of the repayment depends on how much more than £21,000 the employee earns. Student loan repayments are made at 9% of these extra earnings. ifs Certificate in Personal Finance (CPF5)

Case Study 7 Sanjay earns £22,000 a year – that is £1,000 more than £21,000. Student loan repayments are made at 9 per cent of these extra earnings. Sanjay makes repayments each year of: 9% x £1,000 = £90 Note: There is no set length of time over which to repay this type of student loan. ifs Certificate in Personal Finance (CPF5)

Activity 3h Mia earns £26,000 per annum. How much will her student loan repayments be? £26,000 - £21,000 = £5,000 £5,000 x 0.09 = £450 So, Mia’s student loan repayments will be £450 per year. ifs Certificate in Personal Finance (CPF5)

National Minimum Wage By law employers must pay works a minimum amount of money per hour. This amount of money is what is known as the ‘National Minimum Wage’. The government introduced the concept of a minimum wage to make sure that employees were not forced to work for a low and unfair rate of pay. ifs Certificate in Personal Finance (CPF5)

National Minimum Wage The ‘National Minimum Wage’ applies to all employees in the UK ages 16 and over. It varies according to how old the employee is, as follows: ifs Certificate in Personal Finance (CPF5) AgeMinimum per hour until 30 September 2014 Minimum per hour from 1 October £3.72£ £5.03£ and over£6.31£6.50

Activity 3i a)What is the minimum wage that Connor (who is 17) must be paid? The minimum wage for Connor is £3.83. b)What is the minimum wage that Demi (who is 19) must be paid? The minimum wage for Demi is £5.18. ifs Certificate in Personal Finance (CPF5)

Activity 3j Kit works at Arnold and Walsh, a firm of solicitors. He earns £23,000 per year. Kit is repaying a student loan. ifs Certificate in Personal Finance (CPF5)

Activity 3j continued a)How much money will Kit get on 1 June 201X? Kit will get £1, on 1 June 201X. b)How much is his student loan repayment for the month. Kit’s student loan repayment for the month is £15. ifs Certificate in Personal Finance (CPF5)

Tax and NI paid to date Payslips also tell employees the total amount of ◦ Taxable pay earned in the year, so far. ◦ Tax and NI paid in the year, so far. ifs Certificate in Personal Finance (CPF5)

P45 and P60 P45 and P60 are two common tax documents that must, by law, be given to you. P45 – used when you stop working for an employer. ◦ Record of taxable income and Tax and NI paid so far. ◦ Give it to a new employer to continue tax payments. P60 – summary of your pay and deductions for the year. ◦ Given at the end of every tax year. ifs Certificate in Personal Finance (CPF5)

Self Employment Income tax and NI Self-employed people do not know how much they will earn in a year until the year is ended. So, self-employed people cannot pay income tax as they earn, using PAYE. Instead, they fill in a tax return at the end of the tax year, and calculate how much tax and NI they owe. They then pay the tax and NI to HMRC. This method is called ‘self-assessment’. Q. If Evan makes a mistake and pays too little income tax, what do you think HMRC will do? ifs Certificate in Personal Finance (CPF5)

Self Employment Tax return (self-assessment) Self assessment involves completing an online or paper tax return in order to tell HMRC about your income. HMRC uses the figures on the tax return to work out your tax bill, or you can work it out yourself. People need to complete a self-assessment form if they have more complicated tax affairs, or have earnings that are not taxed through PAYE. This might include a person who has two jobs, the total earnings from which to put them in the higher rate tax band. ifs Certificate in Personal Finance (CPF5)

Case Study 8 BASIC WAGE CALCULATIONS Dan is working for a company making car parts. He is paid £10 an hour and works a 40-hour week. His weekly pay is: 40 x £10 = £400 The company is busy and his supervisor asks Dan to work some extra hours. Dan’s company pays overtime at one-and-a-half times his normal pay. So his overtime hourly rate is: 1.5 x £10 = £15 Dan does 6 hours overtime and so will earn an additional: 6 x £15 = £90 Dan’s total pay for the week is: £400 + £90 = £490 ifs Certificate in Personal Finance (CPF5)

Activity 3k a)Zack works a 40-hour week in a shop. He is paid £6 an hour. He does an extra eight hours overtime at time and a half. What is his pay for the week? Basic pay for the week is: £6 x 40 = £240 Overtime is at £9 an hour: £6 x 1.5 = £9 Zack did 8 hours overtime: £9 x 8 = £72 Zack’s pay for the week is: £240 + £72 = £312 ifs Certificate in Personal Finance (CPF5)

Activity 3k b)Karim works a 40-hour week in a gym. He is paid £6 an hour. He does an extra four hours overtime at time and a quarter. What is his pay for the week? Basic pay for the week is: £6 x 40 = £240 Overtime is at £7.50 an hour: £6 x 1.25 = £7.50 Karim did 4 hours overtime: £7.50 x 4 = £30 Karim’s pay for the week is: £240 + £30 = £270 ifs Certificate in Personal Finance (CPF5)

Activity 3k c)Nicky works a 40-hour week in a boutique. She is paid £5.50 an hour. She also works seven hours on a bank holiday and gets double time. What is her pay for the week? Basic pay for the week is: £5.50 x 40 = £220 Overtime is at £7.50 an hour: £5.50 x 2 = £11 Nicky did 7 hours overtime: £11 x 7 = £77 Nicky’s pay for the week is: £220 + £77 = £297 ifs Certificate in Personal Finance (CPF5)