LOW PAY UNIT - ADVICE LEAFLET

Income Tax and National Insurance Contributions 2002/2003

Under the law there are certain deductions employers have to make from employees' wages. These include tax and national insurance.

National Insurance

Paying, or being credited with paying, National Insurance Contributions (NICs) entitles you to certain benefits when you are unable to work. These include statutory sick pay, statutory maternity pay and contributory job seekers' allowance. NICs also count towards your retirement pension.

How much you pay depends on how much you earn, and whether you are "contracted in" or "contracted out".

If you earn less than £75 (the lower earnings limit) you don't have to pay anything. If you earn between £75 and £89 (the primary threshold) you still do not have to pay NICs but you are credited as if you had.

If your earnings go above this above this you must pay 10 per cent on earnings between £89 and £585. Your employer must also make contributions.

For example, if you earn £150 a week, you will pay:

    10% of £63 (£150 - £89 = £61) = £6.10

NICs are important because they entitle you to certain contributory benefits and count towards your pension. If you have not built up a full contributions record, you may find you do not qualify for a full Basic State pension when you retire. In some circumstances, if you are not working, for example, you are sick or unemployed and signing on, or you are caring for someone, you will be 'credited' with contributions.

Some employers deliberately pay less than the National Insurance threshold to avoid paying the employers' contribution. If you are earning just below the lower earnings limit it may be worth trying to negotiate an increase so you can build up your NI contributions record. Neither you nor your boss will pay contributions until you earn more than the 'secondary' threshold, currently £89. If this is not possible, and you want to keep your pension and contributory benefits rights, and you can afford it, you can pay 'voluntary contributions', currently £6.75 a week (known as Class 3 contributions).

Summary of NICs payable

What if you discover that NICs are not being deducted from your pay?

If you get paid "cash in hand", your employer may not be paying national insurance. This may seem like a good idea because you receive more in your pay packet, but it is illegal and affects your other rights.

Apart from losing your right to certain benefits, you may not be eligible for other employment rights as your contract can be deemed illegal.

If the Inland Revenue discovers that "cash in hand" payments have been made unlawfully, they can prosecute you and your employer. You may have to pay back any contributions that have not been made.

What if an employer is deducting NI but not passing it on?

If you suspect, or find out, that your national insurance is not being paid, you must raise it with your employer preferably in writing. If you don't query it, you may find yourself denied basic benefits because you have not paid enough NI contributions.

Checklist for employees:

• Check your wage slips for NI deductions. You have a right to an itemised pay slip under the Employment Rights Act 1996. Always keep your wage slips.
• Contact the Inland Revenue to check your contributions record. You will need to give them your national insurance number. It is best to write to them, keeping copies of all correspondence.
• Speak to your colleagues. It is more effective if you can tackle the problem together.
• Keep pursuing the Inland Revenue as you may not get a satisfactory reply the first time.

Income tax

Most employees pay income tax through Pay As You Earn (PAYE) on earnings above their personal allowance. Personal allowance thresholds changed on 6th April 2002.

The basic personal allowance for under 65s from 6th April 2002 is £4,615

Married Couples Allowance has been restricted to couples over 65. Children's Tax Credit (CTC) was introduced on 6 April 2001 as a new form of income tax relief for parents of children under 16 at the start of the tax year. From 6th April 2002, if you qualify it reduces your income tax payments by up to £529 a year, or £10.17 a week. If you have a new baby, you can get additional tax relief during its first year, up to £1049. You will only get the full relief if you are paying at least £529 a year in tax. For higher rate tax payers, the credit is reduced by £1 for every £15 of income taxed at the higher rate.

Only one CTC is available per family, and it must be claimed. For an application form call the CTC helpline on 0845 300 1036 or contact your local Inland Revenue office.

Your PAYE Code

Your PAYE code shows the first three numbers of your total allowance, followed by a letter. For example, a person without children will normally have a PAYE code of 453L. This means his/her tax free income will be £4,615 a year (£89.00 per week).

Tax bands

Income tax is payable at different rates, depending on how much you earn.

Bands	2001/2	2002/3
Starting rate 10%	£0-£1,880	£0-£1,920
Basic rate 22%	£1,881-£29,400	£1,921-£29,900
Higher rate 40%	Over £29,400	Over £29,900

Taxable bands change this year on 18th June. The amount you pay in tax may differ slightly from one month (or week) to the next because tax is calculated on an annual basis and adjustments may be made throughout the year. If you think an amount is wrong, find out which tax office your employer uses and check with them.

Below are examples of how much a person would pay in tax. NB. Please note that these are 'illustrative examples only.

This person would pay £9.01 in tax and £6.30 in national insurance, a total of £15.31, leaving £134.69 net pay.

A parent claiming CTC on the same wage would have £10.17 deducted from his/her income tax bill so would pay only NICs.

For further information on income tax, contact your local tax office or tax enquiry centre - details in the phone book under Inland Revenue or on the Inland Revenue website. You should give them your national insurance number, your PAYE code and your full address.

Understanding your tax form

Form P46
This is given to you by your employer when you start your first job. You must sign and return it to the employer. It is to inform the tax office that you have started work.

Form P15
This is given to you by your employer. You use it to apply to the tax office for your tax allowance.

Form P45
This should be given to you by your employer when you leave your job. It will tell you your earnings to date, your tax code and the amount of income tax you have paid. You should give it to your new employer or the DSS, if you are signing on unemployed.

Form P50
This a tax rebate form, for if you don't intend to return to work, or are signing on unemployed (for example, you may enter full-time education). You fill this form out and return it to the Inland Revenue with your P45.

Form P60
Each year your employer should give you a P60 which shows the total amount of tax and NI deducted from your pay.

These are very useful documents. Keep them safe.

For further details contact:

ERAS
Low Pay Unit
9 Arkwright Road
London NW3 6AB
Advice line: 020 7431 7385

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