How to Read Your Payslip: A Complete Guide to Understanding Your Paycheck

How to Read Your Payslip: A Complete Guide to Understanding Your Paycheck

If you find that reading your payslip can be a complicated process, then you’re not alone. In a survey conducted in 2022, it was revealed that more than 1 in 4 employees struggle to understand their paychecks. Whether it’s an unfamiliar acronym or a technical term, this confusing language can often mean that we’re unsure if the information we are being presented with is actually correct. This article will break down the different components of your payslip to give you a better understanding of your earnings and ensure you’re being properly paid without facing any incorrect deductions.

Understanding Gross Pay and Net Pay

Two of the most significant figures on your payslip are your gross and net pay. Your gross pay is your total income before any deductions are made. It's the "headline" figure in your salary negotiation and what people generally refer to when discussing wages.

Net pay, on the other hand, is what you actually take home after all the deductions have been made from your gross pay. These deductions are often things such as income tax, national insurance and pension contributions. It's critical that understand the difference between these two figures as the net pay is what you'll actually receive in your bank account.

Unraveling the Mystery of Tax Codes

Tax codes might look like a confusing set of letters and numbers, but they're actually fundamental to determining how much tax you pay. Your tax code is given to you by HMRC, and it tells your employer how much income tax to take from your pay. Let’s take a closer look at some specific tax codes and what they mean.

1257L: This tax code is used for most people and signifies that you qualify for the standard tax-free allowance of £12,570.

However, if your tax code ends differently, it is crucial that you understand what it means.

M: You’ve received a transfer of 10% of your partner’s Personal Allowance.

N: You’ve transferred 10% of your Personal Allowance to your partner.

T: Your tax code includes other calculations to work out your Personal Allowance.

Also read: Tax Codes Explained: What Does The T Mean On My Tax Code?

OT: Your Personal Allowance has been used up, or your new employer hasn’t yet been informed of your new tax code.

BR: All your income from this job or pension is taxed at the basic rate.

D0: All your income from this job or pension is taxed at the higher rate.

D1: All your income from this job or pension is taxed at the additional rate.

NT: You’re not paying any tax on this income.

S: Your income or pension is taxed using the rates in Scotland.

C: Your income or pension is taxed using the rates in Wales.

M1, W1 or X: You are on an emergency tax code.

If you’re on an emergency tax code, this means your tax is being calculated on a non-cumulative basis with no regard to your earnings or tax paid in previous months of the tax year. If you're on such a code, it's essential to resolve it quickly.

Demystifying Pension Contributions

Pension contributions are generally made by both you and your employer, and these contributions build up over time to provide you with a retirement income. The amount contributed by yourself and your employer typically depends on the pension scheme that you are on. Double-check these figures to ensure your pension is being effectively managed.

Common Reasons For Being Overtaxed

Being overtaxed can happen for several reasons, understanding your payslip and knowing your tax rate can help you identify these issues early. Let’s take a look at some common examples.

Incorrect Tax Code: As previously mentioned, your employers use this to determine how much tax to deduct from your salary. If this is incorrect, you may be paying too much tax.

Multiple Sources of Income: If you have more than one source of income, HMRC might not have all the information needed to calculate your total tax liability correctly. This can result in overpayment.

Not Claiming Tax Allowances: The UK tax system provides various tax allowances, and exemptions, such as the personal allowance or marriage allowance. Failing to claim these benefits can lead to overpayment of your taxes.

Pension Contributions: If you have a workplace pension, your employer may be deducting contributions based on your earnings before tax, which is incorrect. This could also result in overpayment.

If you believe you have been overtaxed, it is important that you contact HMRC immediately, as you may be eligible for a tax refund.

Making Sense of National Insurance Contributions

National Insurance (NI) contributions are payments made to the government which allow you to qualify for certain benefits, including your state pension. The amount you pay is determined by your employment status and how much you earn. This is represented by your unique NI number which ensures that the NI contributions and the taxes that you pay are effectively recorded. This figure is deducted from your gross pay but reviewing this regularly is a good idea, to keep track of your contributions and check for any mistakes.

Key Takeaways

Understanding the different components of your payslip is fundamental in ensuring you are being paid the correct amount and any deductions are accurate. Misunderstanding or lacking knowledge on these components is often the primary reason for overtaxing or financial errors. If you have any questions about your payslip or need help filing an accurate tax return, get in touch with Taxd, we’d love to help.

The Taxd easy-to-use self-assessment tool simplifies the complexities of filing a tax return and ensures you’re not overpaying on your taxes. Visit our website today!