Understanding how PAYE (Pay As You Earn) deductions work is essential for every employee. The PAYE system is a method by which tax is deducted from your income at source by your employer. The deductions cover income tax, National Insurance contributions (NIC), pension contributions, and other statutory deductions. Sometimes, employees may notice discrepancies in their paychecks or have concerns about the accuracy of the deductions.
If you’ve ever wondered whether your PAYE deductions are correct or if you’re paying too much or too little, you’re not alone. This article will guide you on how to check whether your PAYE deductions are correct and what steps to take if something doesn’t seem right.
1. Know the Components of PAYE Deductions
Before you can determine whether your PAYE deductions are correct, it’s important to understand what constitutes these deductions:
- Income Tax: This is the tax levied on your earnings. The amount deducted depends on the tax band that your earnings fall into.
- National Insurance Contributions (NIC): NIC are payments that contribute toward state benefits, such as pensions and healthcare.
- Pension Contributions: Some employers automatically deduct contributions to a pension scheme.
- Student Loan Repayments: If you’ve taken out a student loan, your repayments may be deducted from your salary based on your income.
- Other Deductions: This could include deductions for things like charitable donations, union fees, or loan repayments.
By familiarizing yourself with these components, you’ll be in a better position to check your PAYE deductions.
2. Review Your Payslip
Your payslip is the most direct way to check your PAYE deductions. It should break down all the deductions in a clear format. Key things to look for:
- Gross Salary: This is your total earnings before any deductions.
- Taxable Pay: This shows how much of your earnings are subject to tax after personal allowances and deductions.
- Income Tax: Look for the amount of income tax that’s been deducted. This should correspond with your tax code and earnings.
- National Insurance Contributions: Your NIC should be listed separately and should correspond with the appropriate NIC category.
- Pension Contributions: If applicable, check for the correct deduction for your pension.
Tip: Compare your payslips from month to month or year to year to see if deductions align with your earnings.
3. Check Your Tax Code
One of the most common reasons for incorrect PAYE deductions is an error with your tax code. Your tax code determines how much of your income is tax-free before you start paying tax.
Here’s how to check if your tax code is correct:
- Look at the Tax Code on your payslip. It is usually a series of letters and numbers (e.g., 1250L, BR, or 0T).
- The Numbers: The numbers in the tax code represent the amount of tax-free income you’re entitled to. For example, 1250L means you have a £12,500 tax-free allowance.
- The Letters: The letters refer to specific circumstances, such as whether you’re claiming tax-free allowances (L), or if you’re being taxed on all of your income (BR).
If you believe your tax code is incorrect, you can contact HM Revenue & Customs (HMRC) to clarify.
4. Understand Your Tax Bracket
In the UK, your income is taxed based on different tax bands or brackets. The current income tax bands are as follows (for the 2024/25 tax year):
- Personal Allowance: Up to £12,570 (tax-free)
- Basic Rate: £12,571 to £50,270 (20%)
- Higher Rate: £50,271 to £150,000 (40%)
- Additional Rate: Over £150,000 (45%)
Knowing these bands will help you assess if the income tax deducted from your pay is correct. If your salary is in the higher bands, you should expect a higher rate of tax to be deducted.
5. Review National Insurance Contributions
NICs are another crucial part of PAYE deductions. You will pay Class 1 NICs if you’re an employee. The rates for the 2024/25 tax year are:
- Primary Class 1 NICs: Paid by employees
- 12% on earnings between £12,570 and £50,270
- 2% on earnings above £50,270
- Employer NICs: Paid by the employer, not deducted from your pay.
If you believe your NICs are incorrect, check your income and the NIC rates for the current tax year. If something seems off, reach out to HMRC.
6. Understand Pension Contributions
Employers must automatically enroll eligible employees in a pension scheme. Employees contribute a percentage of their salary toward the pension fund. The minimum employee contribution is currently 5%, with the employer contributing 3%. If you’ve opted out or changed pension schemes, your deductions may vary.
To ensure your pension contributions are correct:
- Check the contribution percentage listed on your payslip.
- Compare it with the statutory minimum or any additional contributions you’ve agreed upon with your employer.
7. Check Student Loan Deductions (If Applicable)
If you have a student loan, your repayments may be deducted from your salary under the PAYE system. There are different types of student loans (Plan 1, Plan 2, and Plan 4), and the repayment amount depends on your income.
Check the following:
- Student Loan Plan: Your loan type determines how much is deducted. Ensure your employer knows which plan applies to you.
- Income Threshold: Repayments are only due when you earn above a certain threshold. For Plan 2, the threshold for 2024/25 is £27,295, meaning you’ll only repay once you earn above this amount.
8. Use HMRC Tools to Check
If you’re still unsure about the accuracy of your PAYE deductions, HMRC provides online tools to help you check:
- Personal Tax Account: You can log in to your personal tax account on the HMRC website and review your current tax situation.
- Income Tax Calculator: Use the online calculator to check if you are paying the correct amount of tax based on your income.
9. Talk to Your Employer or HMRC
If after checking your payslip, tax code, and deductions you believe something is wrong, your first step should be to contact your employer’s payroll department. They can explain the breakdown of your pay and deductions.
If they’re unable to resolve the issue, you can contact HMRC. You can call them, use their online services, or write to them if necessary. Ensure you have your National Insurance number, pay details, and payslips handy for a smoother process.
10. Keep Records
It’s always wise to keep a record of your payslips, tax codes, and any correspondence with HMRC or your employer. This will help you keep track of your deductions and quickly resolve any issues that may arise.
Check also: Is Your Employer Paying Your PAYE Tax? Here’s How to Check!
Checking if your PAYE deductions are right may take a little time and effort, but it’s worth it to ensure that you’re not overpaying or underpaying your tax or other contributions. By reviewing your payslip, understanding your tax code, and using available tools from HMRC, you can quickly spot any issues. If you do find any discrepancies, don’t hesitate to contact your employer or HMRC to correct them.
Being proactive and informed about your PAYE deductions can save you from future financial surprises and ensure that your contributions are correct.
