12. Earnings

Question 1

Laws + legislation that applies to earnings?

Answer 1

• national minimum wage
• maximum working hours
• income tax and national insurance
• income tax returns

Question 2

Tax and how it’s spent

Answer 2

• people who earn money from being employed or self employed pay income tax or national insurance
• money goes to the government - spent on health, pensions, benefits etc.

Question 3

What does national insurance go towards?

Answer 3

Pensions, health and benefits

Question 4

What is PAYE

Answer 4

the system employers or pension providers use to take income tax and national insurance contributions before they pay your wages or pension

Question 5

What is national minimum wage?

Answer 5

• lowest hourly wage an employee can be paid
• 23 and over : £10.42
• 21 to 22: £10.18
• 18 to 20: £7.49
• under 18 (and apprentices) : £5.28

Question 6

What are the maximum working hours?

Answer 6

• 48 hours per week
• most working people do an average of between 38 and 40 hours a week
• doesn’t apply to members of the armed forces, emergency services, domestic workers in private households

Question 7

Holidays/breaks

Answer 7

• an employee who works 5 days a week is entitled to at least 5.6 weeks paid holiday
• employees are entitled to at least one day off per week
• if the working day is 6 hours + an employee is entitled to a break of 20 mins

Question 8

What is income tax?

Answer 8

• paid on earned and unearned income
• paid according to how much an individual income is

Question 9

What is a personal allowance?

Answer 9

• Amount of income an individual can receive before they pay income tax
• personal allowance is currently just over a £1000 a month (£12,570)

Question 10

What is the basic income tax rate?

Answer 10

£12,571 to £50,270 —> 20%

Question 11

What is the higher income tax rate?

Answer 11

£50,271 to £150,000 —> 40%

Question 12

Additional income tax rate?

Answer 12

Over 150,000 —> 45%

Question 13

Income tax on savings

Answer 13

• savers pay income tax on their savings
• the Personal Savings Allowance was introduced in 2016 -> was a reform that meant savers only have to pay tax on the interest that exceeds their personal allowance

Question 14

What is the personal savings allowance currently?

Answer 14

• £1,000 for basic tax payers
• £500 for those earning within the higher tax bracket (those paying 40% income tax)

Question 15

Who pays national insurance?

Answer 15

• aged between 16 and state pension age
• and an employee earning £8,632 to £50,000 has to contribute 13.5%
• self employed and make a profit of over a specified amount each year
• NI is not payable for young apprentices

Question 16

Employee and employer contributions

Answer 16

• employee and most angency workers make Class 1 contributions, collected via PAYE together with their income tax

Question 17

How is income tax and NI payed?

Answer 17

• payed by the employer to HMRC (his majesty’s revenue and customs) through the PAYE scheme (pay as you earn)
• tax code shows how much tax you need to pay each year

Question 18

NI for self employed

Answer 18

• can pay 2 types of national insurance - Class 2 and Class 4
• class 2 -> £3.15 a week
• class 4 -> 9.73% on profits between £11,909 to £50,270 , 2.73% on profits over £50,270

Question 19

What is a PAYE document?

Answer 19

• employers must provide employees with information about income tax and national insurance on their pay slip - there are 3 documents
  1. Payslip
  2. P60 - this shows all paid income tax and NI contribution at the end of the financial year
  3. P45 - is issued when an employee leaves and provides a summary of NI and income tax paid

Question 20

Payslip

Answer 20

• shows earnings before and after deductions
• deductions include - income tax, national insurance, pension contribution etc.

Question 21

P45

Answer 21

• employers must issue an employer this when they leave
• this allows the new employer to calculate how much tax and NI to pay

Question 22

P60

Answer 22

• must be issued to every employee at the end of the financial (tax) year

Question 23

Tax return for self employed

Answer 23

People should keep all records that relate to their tax return for at least 22 months after the end of the tax year