The different types of payroll deductions
All employees receive a gross wage for the services they provide to their employers. The amount of money an employee takes home in their pay packet, i.e. the net pay, is always less than the gross wage, and the amounts taken off the gross wage are known as payroll deductions. Some payroll deductions are mandatory and there is no getting away from them and all employees will suffer these payroll deductions. Other types of payroll deductions are not mandatory and will only affect specific employees in specific circumstances.
Unfortunately, the cash we earn is not the cash we take home and all employees suffer some payroll deductions.
Payroll deductions include payroll taxes, which consist of pay as you earn tax (“PAYE”) and National Insurance Contributions. Payroll taxes are mandatory payroll deductions that all employees, who earn over a specific amount, have to suffer. As an employee there is nothing you can do about payroll taxes since your employer will calculate your payroll tax liability and National Insurance Contributions and automatically deduct the tax liability from your gross wage before paying it over to the taxman on your behalf.
Each and every country has its own payroll tax legislation therefore the amount of the tax payroll deductions will depend on where you live and your specific circumstances. In the UK there are two payroll tax bands. The first payroll tax rate is referred to as basic rate, which is a rate of 20%. The second payroll tax rate is referred to as higher rate and is at 40%.
Sage Payroll is one of the best payroll software packages on the market. Like all programs, Sage Payroll will automatically calculate all the payroll deductions for you.
At the end of the tax year you will receive a Form P60 which is a summary of your gross wages for the year less the payroll tax deducted during the tax year. The end of year Form P60 is your proof of the amount of payroll tax you have suffered should the taxman ever investigate in to your tax affairs. It is worth noting the taxman can go back and investigate tax affairs for six years, therefore it is important you retain you end of year Form P60 for at least six years from the date it is issued.
Just like the income tax deductions the National Insurance Contributions are calculated by your employer and then deducted from your gross wage. The National Insurance Contributions payroll deduction is charged at a flat rate of 12.8% on the gross wage less a monthly allowance, regardless of whether you are a basic rate tax payer or higher rate tax payer.
It is not only employees who have to pay National Insurance Contributions as there is an Employer’s National Insurance Contribution which is an additional expense. The employer’s National Insurance Contributions expense squeezes the profit margins however they are an allowable expense for corporation tax purposes, so employers do get some tax relief.
There are other payroll deductions you may have to suffer. These additional payroll deductions are not mandatory and will depend entirely on your specific circumstances.
Some employers operate a contributory pension scheme for their employees. If your employer operates a pension scheme and you join the pension scheme your contribution will be a payroll deduction which is taken away from your gross wage. Pension contributions are an allowable deduction for income tax purposes therefore you will get tax relief on the pension contributions. The tax relief is given by deducting the pension contributions from the gross wage before calculating the payroll taxes due.
Some employer’s will make a financial loan to their employees and expect to get the repayments through the payroll. If you have a loan from your employer the repayments will be a payroll deduction. Any loan repayments are subject to income tax and National Insurance and the payroll deduction will be taken off your taxed income.
Where an employer provides a benefit to their employee, such as a company car or some special asset, the employee may have to make a monthly contribution towards the benefit. If you have a benefit and are expected to make a monthly contribution this will be treated as a payroll deduction that is taken off taxed income.
The above is not an exhaustive list and there are many other benefits and perks an employer may provide that will be treated as a payroll deduction.
As you can see there are two mandatory payroll deductions that all employees will suffer, and these are PAYE tax and National Insurance Contributions. There are other types of payroll deductions, although these are not mandatory and will only affect a small number of employees.