Topic 3:
Documentation
for pay and pay
calculations
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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);
- 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
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- income tax and tax codes; and
Earnings
What are earnings?
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.)
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Earnings – the money received for completing a job.
Activity 3a
Consider the following people.
a) Ali delivers newspaper for The Corner Shop and earns £3
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.
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an hour. He also gets £5 each week for pocket money.
Activity 3a continued
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’.
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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.
Gross Pay & Net Pay
 Everyone pays part of their earnings to the Government.
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.
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These payments are called deductions.
Activity 3b
Jimmy will have £994.23 paid into his bank
account.
• £1,100 - £105.77 = £994.23
b) Lizzie has gross monthly pay of £980. She has
to pay income tax of £29.33 and NICs of
£38.04. How much is her net pay?
Lizzie’s net pay is:
• £980 - £29.33 - £38.04 = £912.63
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a) Jimmy has gross monthly pay of £1,100 and
total deductions of £105.77. How much will be
paid into his bank account this month?
Pay as you earn (PAYE)
• Employers collect it from their employees
gross pay and pass it to the Government.
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• PAYE is the way most people pay tax to
the Government.
Payslips
 Employers are required to provide employees with a
 It is usually marked “Private and Confidential”
 It details
◦ Gross Pay
◦ Deductions with reasons
◦ Net Pay
◦ Payment Method
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payslip.
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Activity 3c
• On 1 June 201X, Demi will be paid
£1,266.23
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How much money will Demi be paid on 1
June 201X?
National Insurance (NI)
• Employees pay NI as well as tax. It is used to fund:
- Jobseeker’s Allowance, etc.
• The amount paid depends on:
- How much you earn; and
- If you are Employed or Self-Employed
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- State Pensions;
National Insurance Number
• This is your own personal account number with the
• Used to record tax and NI contributions.
• Reference for Social Security system
- Claiming benefits
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Government.
Who do you think uses your
national insurance number?
- HMRC
- Employer
- Student Loan Company
- Government Benefits Agencies
- Banks
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• You must give your NI number to
Calculating NI
• NI is calculated weekly.
status
• Most pay
• Class 1 : 12% of earnings between £153 and £805
: 2% of earnings over £805.
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• Different “classes” – depends on pay and employment
Case Study 1
Karim is employed and earns £12,480 a year. This works out
£153 per week.
Calculate Karim’s weekly NI contribution.
So,
£240 - £153= £87
Karim has to pay:
12% x £87 = £10.44 per week.
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as £240 a week. He does not have to pay NI on the first
Case Study 2
Mark is also employed. He earns £52,000 a year. This works
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
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out at £1,000 per week. He does not have to pay NI on the
Case Study 2 continued
He also has to pay 2% on earnings between £805 a
£1,000- £805 = £195
2% of £195 = £3.90
So Mark has to pay:
£78.24 + £3.90 = £82.14 per week
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week and £1,000 per week.
Did you know?
Part-time workers can sometimes have a surprise,
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.
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because they may get a deduction for NI in a
Case Study 3
Priya has a part-time job of ten hours a week at £8 per hour.
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 = £264.76
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• Does Priya pay NI?
Income Tax and Tax Codes
 Earnings are taxable
 Tax is paid to Her Majesty’s Revenue and Customs
 Each taxpayer receives a personal allowance
◦ This is the amount they can earn tax-free.
◦ For 2014-15 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.
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(HMRC).
Case Study 4
• What is her taxable pay?
Demi’s taxable pay is:
£18,000 - £10,000 = £8,000.
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Demi earns £18,000 a year. Her personal
allowance is £10,000.
Activity 3d
£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
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a) Alfie’s personal allowance is £10,000 and he
earns £54,000. What is his taxable pay?
Tax Rate & 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.
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The actual tax paid is worked out as a percentage of
taxable pay. The government calls this a ‘tax band’:
Case Study 5
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.
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Demi earns £18,000 and we worked out above
that her taxable pay is £8,000.
Case Study 5 continued
Because she is paid monthly, her employer
takes from her monthly pay under the PAYE
scheme:
£1,600 ÷ 12 = £133.33
If you look at Demi’s pay slip, you will see that
this is the amount of tax that has been deducted.
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How much tax will she pay each month?
Case Study 6
£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.
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Alfie earns £54,000 and we worked out above
that his taxable pay is:
Case Study 6 continued
He pays tax at the basic rate on the first
at a higher rate on the rest – that is:
£44,000 - £31,865 = £12,135.
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£31,865 of his taxable income and he pays tax
Case Study 6 continued
We can set the calculation out as follows.
Rate
Pay in the band
Tax calculation Amount of tax
Basic rate
20%
£31,865
£31,865 x 20%
£6,373
Higher rate
40%
£44,000 -£31,865
£12,135 x 40%
£4,854
Total tax
£11,227
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 = £935.58
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Band
Did you know?
down so that no one pays more tax
than they have to.
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Tax calculations are always rounded
Activity 3e
Work out the monthly tax for the following people.
Jamie’s tax is worked out as follows:
• £24,000 - £10,000 = £14,000
• £14,000 x 20% = £2,800
• £2,800 ÷ 12 = £233.33 monthly tax
b) Becky earns £7,670 and has a personal allowance
of £10,000.
Becky doesn’t pay any tax because her income is less
than the personal allowance.
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a) Jamie earns £24,000 and has a personal allowance
of £10,000.
Activity 3e continued
Work out the monthly tax for the following people.
Hiten’s tax is worked out as follows:
• £76,800 - £10,000 = £66,800
• £66,800 - £31,865 = £34,935
• £31,865 x 20% = £6,373
• £34,935 x 40% = £13,974
• £6,373 + £13,974 = £20,347
• £20,347 ÷ 12 = £1,695.58 monthly tax
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c) Hiten earns £76,800 and has a personal
allowance of £10,000.
Tax Codes
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.
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Employers use a Tax Code to calculate the amount
of tax to deduct from pay.
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.
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Tax Codes
Activity 3f
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.
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Karim, who works in a gym, has a tax code of
803L. He earns £12,480 in a yea.
Activity 3f
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
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a) Work out Karim’s monthly gross pay.
Activity 3f
£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
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c) Work out his monthly tax.
Activity 3f
Gross Pay
Deductions
£1,040
£74.16
Net Pay
£965.84
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d) Work out his pay after tax has been deducted
(that is, his net pay). Calculate this monthly.
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).
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Activity 3g
Activity 3g continued.
a) Jenny has a tax code of 845L and earn
£34,000.
• Taxable Pay: £34,000 - £8,450 = £25,550
• Monthly Tax: £25,550 x 0.20 = £5,110
£5,110 ÷ 12 = £425.83
• Net Monthly Pay: £2,833.33 - £425.83 = £2,407.50
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• Monthly Gross Pay: £34,000 ÷ 12 = £2,833.33
Activity 3g continued.
(b) Aisha has a tax code of 786L and earns
£25,000.
• Taxable Pay: £25,000 - £7,860 = £17,140
• Monthly Tax: £17,140 x 0.20 = £3,428
£3,428 ÷ 12 = £285.66
• Net Monthly Pay: £2,083.33 - £285.66 =
£1,797.67
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• Monthly Gross Pay: £25,000 ÷ 12 = £2,083.33
Activity 3g continued.
(c) Cassandra has a tax code of 680L and earns
£78,000. (Remember to use the higher rate
band for Cassandra).
• Taxable Pay: £78,000 - £6,800 = £71,200
• Monthly Tax: £71,200 - £31,865 = £39,335
£31,865 x 0.20 = £6,373
£39,335 x 0.40 = £15,734
£6,373 + £15,734 = £22,107
£22,107 ÷ 12 = £1,842.25
• Net Monthly Pay: £6,500 - £1,842.25 = £4,657.75
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• Monthly Gross Pay: £78,000 ÷ 12 = £6,500
Overtime
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.
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The amount of time that someone works beyond
normal working hours.
Sick Pay
If you are ill and cannot work, your employer may not pay
you.
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
8th day.
o Your employer will pay SSP at the current rate of £87.55
each week.
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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).
Did you know?
For many employees, their contract
payments than SSP. For example,
teachers who have worked for more
than 3 years are paid on full pay for
100 days of illness.
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of employment gives them better
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.
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Part of the financial support package that the
government provides for students is student loans.
Case Study 7
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.
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Sanjay earns £22,000 a year – that is £1,000
more than £21,000.
Activity 3h
£26,000 - £21,000 = £5,000
£5,000 x 0.09 = £450
So, Mia’s student loan repayments will be £450
per year.
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Mia earns £26,000 per annum. How much will her
student loan repayments be?
National Minimum Wage
• By law employers must pay works a minimum
amount of money per hour. This amount of money
• 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.
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is what is known as the ‘National Minimum Wage’.
National Minimum Wage
The ‘National Minimum Wage’ applies to all
employees in the UK ages 16 and over. It varies
Age
Minimum per
hour until 30
September 2014
Minimum per
hour from 1
October 2014
16-17
£3.72
£3.83
18-20
£5.03
£5.18
21 and over
£6.31
£6.50
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according to how old the employee is, as follows:
Activity 3i
a) What is the minimum wage that Connor (who is
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.
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17) must be paid?
Activity 3j
Kit works at
Walsh, a firm of
solicitors. He
earns £23,000
per year. Kit is
repaying a
student loan.
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Arnold and
Activity 3j continued
a) How much money will Kit get 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.
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Kit will get £1,523.15 on 1 June 201X.
Tax and NI paid to date
◦ Taxable pay earned in the year, so far.
◦ Tax and NI paid in the year, so far.
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 Payslips also tell employees the total amount of
P45 and P60
P45 and P60 are two common tax documents that must,
by law, be given to you.
◦ 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.
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 P45 – used when you stop working for an employer.
Self Employment
Income tax and NI
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?
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Self-employed people do not know how much they will
earn in a year until the year is ended.
Self Employment
Tax return (self-assessment)
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.
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Self assessment involves completing an online or paper
tax return in order to tell HMRC about your income.
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.
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
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His weekly pay is:
Activity 3k
a) Zack works a 40-hour week in a shop. He is paid £6
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
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an hour. He does an extra eight hours overtime at
Activity 3k
b) Karim works a 40-hour week in a gym. He is paid £6
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
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an hour. He does an extra four hours overtime at
Activity 3k
c) Nicky works a 40-hour week in a boutique. She is
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
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paid £5.50 an hour. She also works seven hours on