INCOME TAX
Content taken from Tax Matters
(www.taxmatters.hmrc.gov.uk)
reproduced with kind permission
of HM Revenue & Customs.
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
WHAT IS TAX?
(An amount of) money paid to the government,
which is based on your income or the cost of goods
or services you have bought
Definition – Cambridge Dictionaries Online
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
2
WHAT ARE THE MAIN TYPES OF TAX PAID
BY INDIVIDUALS?
Income Tax (also
known as PAYE)
Excise Duties
Value Added Tax
(VAT)
Council Tax
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
3
MEET BILL McGONAGLE
• William A McGonagle (nicknamed
Bill) is a carpenter working for a
small company called Flywheel and
Driftwood based in Grimsby. He’s
been there for three years and is
particularly good at roofs and stairs.
• At the end of each week Bill gets his
payslip and the company pays the
money into his bank account.
• Bill went to university to study
design and technology. Now he’s
earning enough to start paying off
his student loan (£11 a week).
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
4
Bill’s pay …
• How much goes into the bank account depends on how
many hours he works. He gets £50.00 basic pay a week,
plus £10.00 an hour.
• Most weeks, he does about 37 hours, so his gross pay
before deductions (tax and so on) for the week is £420.00.
• Bill gets a personal allowance like everyone else (that’s
£6,475 tax-free for the 2009 – 2010* tax year – the
amount usually changes every year).
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
5
…and deductions
Each week when he gets his pay, Bill checks his payslip.
On a typical week’s pay of £420.00 the company takes off:
•basic rate income tax at 20% (that comes to £59.00)
•National Insurance (£34.10)
•student loan repayment (£11.00)
•Bill’s contributions to the company pension scheme (£10.00 a week)
•non-taxable deductions (£40 a week for season ticket recovery)
On the next page you’ll see one of Bill’s payslips.
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
6
Bill McGonagle’s payslip
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
7
WHAT DOES PAYE STAND FOR?
• Pay All Your Earnings
• Pay As You Earn
• Pay At Your Ease
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
8
AT WHAT AGE CAN YOU START PAYING
INCOME TAX?
a. 16
b. 18
c. 0
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
9
WHAT IS A PERSONAL ALLOWANCE?
• The money you get
back if you have
overpaid your tax
• The money you can
earn before paying tax
• The extra money you
pay if you have
underpaid your tax
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
10
WHAT ARE THE BASIC, HIGHER AND
ADDITIONAL TAX RATES IN 2010-2011?
a. Basic 10%, higher 25%,
additional 40%
b. Basic 20%, higher 50%,
additional 60%
c. Basic 20%, higher 40%,
additional 50%
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
11
ANSWERS TO MULTIPLE CHOICE
QUESTIONS
1. PAYE = Pay As You Earn
2. There is no minimum age to pay income tax – you just
need to have an income.
3. Your personal allowance is the money you can earn
before paying tax (and was set at £6,470 in 2010).
4. The basic tax rate is 20% on income up to £37,400
above the personal allowance. The higher tax rate is
40% on income between £37,400 above the personal
allowance and £150,000. Above that, income is taxable
at 50%.
Bill McGonagle’s payslip
Money Works: Level 2 Topic 4
12