If you want to find out more about the various PAYE tax rates for 2019/2020, read on. PAYE is an acronym for pay as you earn, and workers who are directly employed through companies or who work under umbrella companies are paid in this manner. Many freelancers and contractors opt to join umbrella companies to avoid the administrative burden that comes with going it alone. When you join an umbrella company, you can get all the finance admin support you need so you can focus on what you do best – doing your job.
What is the purpose of PAYE?
The PAYE system is designed to ensure workers are paying the correct amounts of tax and NI without falling behind with their obligations. Umbrella companies like One Click Group use specialised payroll software to calculate how much tax and NI their clients need to pay. These figures are then deducted from their payslip, with the remainder being sent to their bank accounts.
How much is my personal allowance?
In England, Wales and Northern Ireland, all workers have a personal allowance of £240 per week before they need to pay any tax. This equates to £1,042 a month or £12.500 a year. Once this minimum threshold is reached, you need to pay 20% on everything above it up to £35,000. You need to pay 40% on annual earnings from £37,501 to £150,000 and 45% on annual earnings above £150,000. If you live in Scotland, the tax rates are not the same, so make sure you look at the different tax bands to see how much you should be paying.
Is the personal allowance the same for everyone?
Your personal allowance enables you to receive £12,500 per year before you need to pay any tax. The tax year starts on the 6th of April and ends on the 5th of April the following year. Your personal allowance may differ if you earn over £100,000 or if you still owe tax from a previous year. If you have overpaid tax in a previous year, your personal tax allowance may be higher. The gov.uk website features a tool that you can use to find out how much tax and NI you should be paying during this current tax year.
How much can I earn before I pay National Insurance?
The purpose of NI contributions or NICs is to help you build your entitlement for things such as the State Pension and other allowances. Self-employed people in the UK are required to pay Class 2 and Class 4 NICs.
Which types of NI do contractors pay?
You need to pay £3 a week in Class 2 contributions from the moment you start self-employment. Class 4 contributions are normally calculated as 9% of your profits, though there are minimum and maximum thresholds. You won’t need to pay Class 2 NICs if your profits are below £6,365 and you only need to pay Class 4 NICs on profits above £8,632. You pay your Class 2 and Class 4 contributions as part of your self-assessment. This means they are part of the total figure requested from you once you have completed your tax return. People who are directly employed pay Class 1 NICs on their earnings, with their employers also making a secondary contribution of 13.8% on earnings above £166 per week.
What are gross and net pay?
Gross pay is the income paid to you before your tax and other deductions are taken away. Your net pay is what is left over once these have been deducted. When people talk about ‘take-home pay’, they are normally referring to your net pay. When you receive your payslip, it will tell you what your gross pay was, how much has been deducted and what the deductions were for.
What if I pay too much or too little tax?
In some cases, you can find yourself paying too much or too little tax over the year. This often happens when you change employers, or your income goes up and down during the tax year. If you find out you have paid too much tax over the course of a year, you can claim it back. However, if you haven’t paid enough you will have to catch up. PAYE isn’t just used to calculate tax on money you have earned. It can also be used to collect tax on funds you have sourced from elsewhere.
What are tax codes?
Self-employed people don’t normally receive tax codes, but these are used to tell employers how much tax to take away from pay. HMRC sends out Coding Notices each year to tell people what their tax code is and inform them how much tax they have been paying. Tax codes are normally made up from a few numbers as well as a letter. The actual figures in a tax code normally tell you how much you can earn without having to pay tax, divided by ten. There is also a letter at the end. The tax code 1250L tells us we can earn £12,500 without paying tax. Codes that start with a BR are used when employers don’t have the information it needs to use the right tax code. When you are on a BR tax code, you have to pay 20% tax on everything you earn, with the minimum threshold being ignored. However, you can reclaim the overpaid tax later after the correct code has been supplied. Having a BR code doesn’t necessarily mean you are paying the wrong amount of tax. If you have two jobs, HMRC may decide to apply the BR code to the second job.
Talk to One Click today
At One Click, we are waiting to hear from you if you are a self-employed freelancer or contractor and wish to remove the fuss and strain from getting paid and paying the correct amount of tax. We have many years of experience in this area and can provide you with all the clarity and support you need. To speak to us today about joining an umbrella company and simplifying the process of meeting your tax and NI obligations, call 0345 557 1287.
Along with over 13 years experience in the contractor payroll industry, and after spending most of his working life as a financial advisor in the regulated financial services industry, Mike has garnered an extensive network of contacts in the recruitment industry, many of whom trust both him and the One Click Group to handle their accounting. Mike has also been a member of various industry bodies throughout the years, such as the British Institute of Recruiters, in order to champion best practices across the contractor payroll industry.