Remember that episode from friends where Rachel gets her first paycheck as a waitress? After a whole month of serving customers, making coffee and cleaning tables, Rachael inspects her paycheck and declares “it was totally not worth it!”, forgetting about the tax that had been deducted from her salary.
To avoid you all having the same shock as Rachel, I’ve written this simple guide to tax for UK graduates.
Figures correct for 21-22 tax year.
Tax on your pay slip
A good amount of your salary never makes it to your bank account as the tax is automatically deducted and detailed on your payslip. This makes it easy for you since you don’t need to calculate anything yourself but you might be surprised just how much is deducted!
Not mentioned below are any pension contributions that you make as this isn’t a tax, although it is deducted from your payslip. I will aim to make a future post on these instead.
Income Tax
Income tax is a tax paid on income either from your job or self-employed earnings. It is used by the government to fund public services such as schools, the NHS and the police. The amount of tax you pay depends on how much you earn and it is based on your yearly earnings.
Everyone has a personal allowance each year that is not taxed at all, currently this is set to £12,570. If you manage to earn over £100k a year though this allowance is slowly reduced to 0.
For income earned above the personal allowance the amount of tax paid varies for each tax band. If your income spans multiple bands you pay multiple rates for the proportion of income that falls into each bracket.
Currently there are 3 different bands (basic, higher and additional).
£12,570 – £50,270 you pay 20%
£50,271 – £150,000 you pay 40%
£150,001 + you pay 45%
The government frequently changes the earning bands that set how much tax you pay – the easiest way to find out about current income tax bands is to look here.
Income tax applies to earnings across the whole tax year which usually runs from April one year to April the next. If you start your graduate job in September, you might find your monthly pay check is taxed as if you earned that amount for the whole year. However, because you actually started earning halfway through the year you are most likely entitled to a tax rebate (tax returned to you) to account for the portion of the year you were still a student and not earning an income.
Usually this is automatically done for you on a future paycheck but it is worth keeping an eye on this because sometimes you have to ring up HMRC to get it sorted out.
National Insurance
National Insurance is a seperate payment to income tax but is a very similar type of charge paid on income from your job or self-employed earnings. The money raised from national insurance is specifically to cover state benefits such as the state pension and statutory sick pay.
You might wonder why these two taxes are separated out on your pay slip. This is mainly for historical reasons as the taxes were introduced at different times. However there are calls for these to be combined to simplify the tax system.
Unlike income tax, national insurance is calculated on earnings in each pay period (rather than over a whole year). This means you will not be entitled to a rebate in national insurance in your first year as a graduate.
National insurance is a bit more complicated to calculate than income tax because there are different rules for different types of workers. If you are employed you will pay 12% of weekly earnings between £183 and £967 and 2% of weekly earnings above £967.
From April 22, national insurance payments will rise by 1.25 percentage points to account for the new health and social care levy announced by the government this year to help fund social care. This means the 12% and 2% above will become 13.25% and 3.25%.
National insurance payments stop once you reach state pension age which is currently 68 years old. (It is possible to retire before this though! This is why you need to make sure you have a workplace pension in place as well as your national insurance contributions.)
Student Loan
Ok so your student loan repayments is not a tax but because of the current repayment rules it feels very much like a graduate tax.
The rules on how much student loan you pay back depend on which plan you are on and how much you earn. For simplicity, I will focus on those with student loans from 2012 in England and Wales.
Currently you pay 9% of everything you earn over the threshold (£27,295 a year). If you are employed this is automatically taken out of your paycheck the same way as your income tax and national insurance is.
You do have the option of paying the loan off in full or making over payments but this is usually not advised. This is because the loan gets cleared after 30 years so unless you are a large earner, you will overall pay less by just paying the standard contribution. More information about repaying can be found here.
Council Tax
Students are exempt from paying council tax, however once you graduate this becomes another tax you need to be aware of and will have to budget for.
Council tax is a tax on your household collected by local authorities in England. It is used to pay for local services such as bin collections and to maintain local roads and parks.
The amount of tax your household pays depends on the size and value of the home you live in. Your home will have a council tax band assigned to it by valuers which equates to the amount of tax you pay. Note that council tax is usually paid by the person who lives in the house rather than the owner so renters still need to pay this one.
Confusingly different councils charge different amounts for each band. This can vary quite a lot – the cheapest council charge for band D is £782 in Westminster whereas the most expensive is £2,125 in Rutland!
Because council tax is paid on the property, if you live with more people you may be able to split the bill between more people and therefore pay less. If you live alone, though, there is a single person discount that you can apply for.
Most councils will allow you to set up a direct debit to pay your council tax. I would recommend this as it means the money will be automatically deducted from your account at the start of the month and you won’t forget to pay it.
Other types of tax
The tax detailed above are the most common types of tax you will encounter as a graduate. However there are other types of tax you may hear people talking about that you affect you at some point in the future.
Inheritance tax
Inheritance tax is a tax paid on the estate of someone who has died including money, property and other assets.
In the UK, inheritance tax applies to estates greater than £325,000, where they are not left to a spouse or charity. The standard tax rate is 40%.
This tax is quite complicated so it is worth reading up on the details if you have come into an inheritance.
Stamp duty
Stamp duty is a tax you pay when you buy a property or land. The amount of tax depends on the price you paid. Rates are different depending on whether you are buying a single home, a home to buy to let or multiple homes. Rates also increase as the house price increases.
If you are a first time buyer there is a stamp duty relief that you can use. This means you pay no stamp duty on properties up to £300,000 and only 5% between £300,000 and £500,000.
More information on stamp duty can be found here.
Unfortunately taxes are something you will have to get your head around sooner or later. As a famous man once said, nothing is certain in life except death and paying taxes!
For more financial top tips – see my post on 5 steps to sorting out our personal finance after university.
