Salary packages explained
The attractive sounding salary that you are being offered on the table is your 'gross' salary, the wage that actually goes into your bank account is your 'net' salary. Somewhere in the middle the taxman takes his cut, and you pay National Insurance contribution.
To compensate for tax loss and in a bid to woo high fliers away from the competition employers may offer further sweeteners on top of your basic salary. These incentives can come in many forms for example, health schemes, a company car, or share options. There can be hidden costs with each of these, and their value may alter with stock market and interest rate fluctuations. Serious consideration needs to be made when accepting anything on top of, or as a part of your salary because once you sign on the dotted line there is no going back.
It's the Tax Man
Managing your personal finance can be a full time job in itself. There is a wealth of information available about tax, insurance, and pensions but most of it is written in the form of incomprehensible jargon. Regardless of whether you are new to employment or have been in work for many years it is very important to follow how much money is going into your bank account each month and more crucially how much is going out.
Income Tax is your
contribution to Government spending. Everyone who earns or receives an
income over a certain amount in the tax year pays income tax, and the
more you earn the more you pay.
If you work for someone else, your employer will usually take the tax from your earnings each payday and pass it on to the Inland Revenue. This is known as 'Pay As You Earn' (PAYE). It takes care of your tax automatically, and saves you having to pay tax in one go at the end of the year. An information leaflet is available from the Inland Revenue (IR34 'PAYE). For detailed Tax information visit the Inland revenue website.
The tax year starts on 6 April of one year and ends on 5 April of the next
Everyone is entitled to a tax-free Personal allowance and the amount you get depends on the following factors:
- Your age on 5 April 2001,and if you are 65 or over,
- Your total income.
There are three levels
of Personal allowance
Basic amount £4,385
- Age 65 -74 £5,720
- Age 75 and over £5,980
If you are earning above your allocated personal allowance you have to pay the following rates of tax:
Current Tax Rates
Starting Rate 10% Up to £1500
Basic Rate 22% £1501 - £28000
Higher Rate 40% Over £28000
How employers calculate how much tax to take off
The Inland Revenue produce 'tax tables' for your employer to use every pay day. These show the tax-free pay for each week or month and how much tax to deduct.
What income is
The most common forms of taxable income are:
- Earnings from full or part-time work, including tips and bonuses
- Profits from a business
- Dividends from shares in a company
- Interest from National Savings investments (except NS Certificates and the first £70 of Interest from ordinary accounts with the National Savings Bank)
- Jobseeker's Allowance (JSA)
- Interest from savings with a bank or building society.
REMEMBER: You can claim back tax you've overpaid
If you are sure that your total income, including your interest and holiday earnings, will be less than your personal allowance (£4,335 in 1999-00) you can arrange for your interest to be paid without tax taken off.
What is a P45,
P46 and P91?
If you are leaving one job to start another it is important to get a P45 from your employer. This is a form that shows:
- Your PAYE code
- Your total earnings so far in the tax year
- How much tax you have paid since the start of the tax year.
- The pay and tax details for the employment just ended.
It is most important you are given a P45. If you do not get one, you may find you have to pay more tax in your new job until your correct PAYE code is confirmed.
A P45 is made up of 3 parts, you should keep Part 1A as a record of your pay and tax and hand the P45 Parts 2 and 3 to your new employer as soon as possible so the right amount of tax is taken from your pay.
If for some reason you don't have a P45 and are starting a new job, your new employer will give you a form P46 which you can sign. If you sign statement B on the form, a temporary PAYE code will be operated for you.
The Tax Office will then try to trace your previous employer so they can give you your proper code. If they can't, they will send you a form P91 asking you for details of your previous job(s). In the meantime, your new employer will continue to use the 'emergency code' for you.
If you go straight to a job when you leave school or college, your new employer will give you a form P46 that you can sign. You can then be given a PAYE code based on the personal allowance for people under 65. Your employer will use this code on your first payday and send the P46 to the Tax Office to let them know you have started work.
You should tell your employer your National Insurance (NI) number as soon as you start work or change jobs. You will also need to quote it whenever you get in touch with the Tax Office because they use it as a tax reference number. If you do not know your NI number, ask at any Department of Social Security Office.
What happens if
I have other income as well as my earnings?
The Tax Office sends out forms at the end of each tax year asking for information on income. These are called Tax Returns. If you are sent one, you must enter details of all the income you receive.
If you do not get a Tax Return and receive other income as well as your earnings, you should contact your Tax Office and ask for one. If the income is not taxed before you get it, or if you are paying tax at a higher rate, your PAYE code may need to be changed. This is so you can pay any tax due on the additional income at the same time as the tax on your earnings.
Most people who work must pay NI contributions. These enable you to get Jobseeker's allowance, Incapacity Benefit and, in due course, the state retirement pension (if it is still available when you are in your dotage). You do not have to pay if you are unemployed.
Each month you will pay NI contribution on what you earn over £329 and up to £2, 318, generally this comes to about 10% of your salary. If your employer runs an occupational pension scheme your contribution is reduced to 8.6%.
Students in full-time education at college or university do not have to pay NI contributions. However, if you work for someone else or are self-employed whilst in full-time education and earn at least a certain amount (which is known as the Lower Earnings Level) you must pay NI contributions.
By the time you're 16 you should have received your NI Numbercard from the Contributions Agency. For more information, see their leaflet FB23 'Young People's Guide to Social Security' which you can get from your local Social Security or Contributions Agency Office.
Employers can offer private health insurance as part of a bonus package. In most cases this can pay for consultations, tests and operations with a private room and without the need for joining a waiting list. Most importantly you can be treated within days - the quickest route back to full health.
As a general rule this scheme is offered by larger companies who may provide cover that encompasses your immediate family. If a company provides this kind of cover, then the Inland Revenue regards the cost of the cover as a taxable benefit and a deduction is generally made in your tax coding.
Bonuses are one off payments that you can earn in addition to your salary. Usually they are linked to the performance/profits of the company. Some companies offer 'guaranteed bonuses' annually whilst others may award them depending on your performance. Christmas time is when it has become common for bonuses to be paid.
After you have been with a company for a while you may be offered the chance to buy shares at a preferential rate. By owning a share in the company employers hope that you will take a more personal interest in its performance. If the company is profitable and doing well then your shares will be worth more should you choose to sell them. Shares in large firms also yield an annual dividend, the sum of which depends upon how many shares you hold and the net profit of the company.
Sometimes there are restrictions placed upon when you can sell the shares. For example you might be given 100 shares a year, but can only sell 20 of these per year over a five-year period.
Some new internet startup firms offer new employers to have a chunk of their salary paid in the form of shares, for example a job may pay a salary of £20,000 but you may be offered £17,000 and £3000 pounds worth of shares at the current value. Employers should be wary of this arrangement, because as quickly as share values can increase they can also go down.
If you are working in sales, you may be paid commission on top of your basic salary. Basically this means that for every sale you make you take a percentage of the profit. For example you may be expected to sell "£5,000 pounds worth of advertising space a month but for every £500 you sell over that target you will receive 10% back as commission.
Companies obviously use this as an incentive for sales people to sell more but naturally, as your commission takings go up then so will your targets!
Some employers offer a car or van for the private use of a director or employee. This can sound fantastic but unfortunately you are still required to pay tax on the car. The amount you pay out is strictly linked to the amount the car is used for work. Generally, the more miles you clock up on business, the less tax you pay - up to a limit.
In the worst-case scenario, you'll pay tax on 35% of the value of the car when new. So, if the car costs £20,000, you'll pay tax on £7,000 of that. This only happens if you drive less than 2,500 miles for work. But if you drive more than 2,500 miles, that figure drops to 25%; and, if you clock up more than 18,000 miles, to 15%.
If you already own a car, you may be offered a cash allowance instead. This is paid as part of your salary. Generally, if you don't expect to drive a lot, this is the better deal.
You may be offered a mobile phone to use for work related calls. Be sure to clarify with your employer what it is they will pay for, mobile line rental, text messaging, personal calls, etc.
Old age may seem a
long way away but by the time you reach your 60's there may no longer
be a state pension. To make provision for your old age it is advisable
that you invest into a private pension plan.
Larger companies may offer its employees the benefit of a company pension scheme. If the employer is a particularly large organisation, it may even appoint a fund manager in the City of London to handle its pension fund.
Traditionally there are two main types of occupational pension scheme in existence:
- Final salary schemes - The benefits you receive are a reflection of the level of your salary in the last few years of your employment. They provide a significant degree of protection against inflation and poor investment returns. These are less common because they can cost companies more.
- Money purchase schemes - You or your employer regularly invests and on retirement you have a pot of money in your pension fund which can then be used to buy yourself an 'annuity'-an income for life. There is no guarantee for the employee as to what level of pension they'll actually receive in retirement.
Investing in a private pension plan is one of the most tax efficient things you can do with your money. If you invest substantially and if investment returns over the period are good, and inflation is low, a nice nest egg can be accumulated for your old age.