Understanding your payslip [by Yasmine Nixon]

Feb 05, 2020

Yasmine Nixon is a Digital Marketing apprentice at Sky.

Entering the world of work comes with lots of new experiences and information. One thing you'll receive which you may not have had before is a payslip. A payslip is a document that outlines your monthly pay along with any deductions such as Tax and National insurance. It’s really important to understand the information on your payslip as it’s your way of ensuring that you are being paid correctly. In knowing you’re being paid properly, you’re able to budget effectively and win at personal finance.

A payslip can be given to you in two ways. It can be printed and delivered to you at work or sent to your home address. Alternatively, you might get a digital payslip. In most businesses, you can access your digital payslip via an online portal. 

There are many components of your payslip that you may not understand which have been outlined below. I’ve created an example payslip for Mary Smith. She earns £23,000 (before tax) and has a personal loan of £4,775.98 which her company gave her to pay over the course of 11 instalments.

Let’s start at the top. Your payslip will include a lot of your personal information.

First, we see an employee reference number - this is how your employer identifies you and ensures you’re paid the right wage. After your name and address, you may see a Tax code. This tells HR how much tax-free pay you’re entitled to and how much tax you must pay. You can find your tax band on the government website here.

Next, is your National Insurance (NI) number. This number is unique to you and ensures that all tax and National Insurance contributions are attributed to you. Along with this, you’ll see a NI category. This helps HR deduct the right amount of NI from your pay. You can find more information about your band here.

The Tax period identifies when in the tax year you’re paying your contributions. The tax year runs from 6th April - 5th April the following year. So Tax Period 9 tells us this a December payslip.

Now… On to the money. We can see from the first pay item (Basic Pay) that Mary earns £1,916.67 a month, but it's important to remember that this is not the amount she gets paid as it doesn't take into account deductions such as Tax and NI. 

Every indidivudal is entitled to earn a certain amount of money a year before they start being taxed (also referred to as a personal allowance). Taxable pay is the total amount of money that you will be taxed on after your personal allowance has been considered. For Mary, this means each month, she will be taxed on £1,896.27 of her pay which, based on her tax band, comes to a total of £170.80 (which is her income tax seen in the row below).

NI’able pay works in a similar way. As you’ll see from her payslip, Mary will have NI deducted from £1,859.17 of her wage which comes to a total of £136.82 (which we can see in the deductions table).

Once these compulsory deductions have been made, we can look at Mary’s optional deductions which include her pension and her personal loan.

Each month Mary uses £57.50 of her pay to put towards her pension scheme. This money isn’t necessarily spent as she will be able to claim it back when she begins to receive her pension (when she retires) and the money is put into her pension pot before tax is deducted so it's a very good way of saving for the future. This article explains more about pensions; it is compulsory for employers and employees in the UK to contribute to a pension scheme but the amounts vary.

We know that Mary was given an interest-free personal loan of £4,775.98 which she is required to pay back over 11 instalments (months). This comes to £434.18 per month. Not everyone will have a personal loan but many people will either have deductions taken out of their wage to pay back for university, travel loans or other large purchases.

Now, to calculate the amount of money that Mary will get to take home we need to subtract the total of her deductions from her basic pay (£1,916.67 - £799.30). This gives Mary a net pay (i.e. the amount she takes home) of £1,117.37. 

This is all the money Mary has from her job in the month. She’ll probably use it to pay for things like her mobile phone, travel and maybe even rent. Anything she has left after that she can spend on other things like food and clothes.

Hopefully, you’re now able to better understand the information that your payslip shares as well as recognise what a payslip looks like. Remember, it’s important to understand your payslip to check that you’re being paid correctly as this will impact your personal budgets and what you’re able to afford.

You can find more information about payslips here.

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