Tax Category Tax: calculations, VAT, self-employment tips and more

How to Calculate Wages After Tax in the U.K.

Calculating your earnings after tax constitutes a complex process involving numerous factors. Though you may prefer to leave the calculations to tax experts, you can still estimate your net wages based on your basic salary. In addition to paying income tax, U.K. employees also have to pay national insurance contributions (NIC). While income tax contributions go to public services such as transportation, education and the NHS, NICs help build up an individual's social security entitlements.

Determine your tax rate. The U.K. deducts income tax from your wages monthly---through the Pay As You Earn (PAYE) system used by employers---as a percentage of your income. The amount you pay will depend on your earnings. For tax year 2010--11, if your earnings do not exceed £37,400, your tax rate will be 20 per cent. Earnings between £37,401 and £150,000 are taxed at 40 per cent, and those above £150,000 attract a 50 per cent tax rate.

Determine your National Insurance category. On top of paying Income Tax, your employer will deduct National Insurance contributions from your wage bill. These contributions go toward your state pension and other benefits including Jobseeker's Allowance, which you receive while seeking employment. NIC rates differ according to the level of income and represent a proportion of your gross earnings (earnings before tax). Typically, employees earning less than £110 (lower limit) are exempt from making National Insurance contributions. However, those who earn more than £110 but less than £844 (upper limit) per week will pay 11 per cent, and anyone earning more than £844 per week will contribute just 1 per cent.

Deduct income tax personal allowance. Also known as your tax code, which appears on your payslip, your personal tax allowance is the amount you are allowed to earn every year tax free and varies between age groups. As of April 2010, if you are under the age of 65 you can earn £6,475 tax free. The amount rises to £9,490 for those between 65 and 74, and then finally £9,640 for those older than 75. Subtract your income tax personal allowance from your gross income to determine your total taxable income.

Work out your net income. After taking into account your Income Tax and National Insurance contributions, you can calculate your approximate wages after deductions. Assuming you are less than 65 years old and earn a basic salary of £42,000 per annum, calculate your estimated net income in the following manner:

The U.K. applies a basic tax-free amount of £6,475 onto a yearly salary of £42,000. Deduct this amount from £42,000 to come up with £35,525 (taxable income). As this amount does not exceed £37,400, your tax rate will be 20 per cent; 20 per cent of £35,525 is £7,105---the amount of income tax you will pay.

As for National Insurance contributions, a yearly salary of £42,000 equals £807.69 per week. The U.K. charges gross earnings between £110 and £844 at 11 per cent for National Insurance---an amount of £4,620.

Therefore, subtract £7,105 and £4,620 from £42,000, which will leave you with £30,275 in approximate net earnings.

Things Needed

  • Basic or estimated salary
  • Individual tax code
  • Income tax rate
  • National insurance rate
  • Calculator