Payroll tax refers to taxes that are removed from a person’s wages at source (by and subsequently paid by their employer). When referring to your own wages, this is what we’d know as income tax. If you’re employed in the UK, then the most common form of paying taxes is Pay As You Earn (PAYE). Employers deduct income tax and national insurance from your gross pay and pay it to HMRC on your behalf using this process, leaving you with your net pay for a particular payroll period.
The level of income tax you pay (payroll tax paid by your employers) depends on how much you earn. In the UK, you don’t pay any tax until you’re earning more than £9,440. This figure is known as the personal tax allowance, and is rising to £10,000 from April 5, 2014.
The basic rate of tax, which is 20%, then applies to anyone who earns from their personal allowance figure up to £32,011 in a tax year.
As an individual earns more money, the more tax they will have deducted from their earnings at source. If an individual earns £32,011 – £150,000 per year, income within this bracket is taxed at 40%. It is important to note that only income above the threshold is taxed at the higher level.
For example, if you earn £36,001 a year, you would pay 20% tax on earnings between £9,445 and £32,011, and 40% on the earnings from £32,012 – £36,011. If this wasn’t the case, then a person earning £33,000 per year would have lower net earnings than someone earning £32,000!
Anyone in the UK earning in excess of £150,000 is taxed at 45%, formerly 50%, on these earnings.
This is where payroll tax hits employers the hardest, as they are required to pay towards employees’ class one national insurance contributions. Individuals are required to pay 12% on earnings between £109 and £797 per week, and an additional 2% on top if earnings exceed the upper limit. However, because employers top up national insurance contributions, individuals only pay around 6 – 8%, depending on what they earn, with the remainder coming from their employer.