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

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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

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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

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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

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…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

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Bill McGonagle’s payslip

Bill McGonagle’s payslip Money Works: Level 2 Topic 4

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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

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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

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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

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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

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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%.

12Bill McGonagle’s payslip Money Works: Level 2 Topic 4