How much attention do you give your payslip? You might glance at it if you’ve worked additional hours or are expecting a bonus, but otherwise, you may pay no attention at all. Yet, looking over the information regularly could help you manage your finances.
The Pay As You Earn (PAYE) system means that most workers don’t need to calculate Income Tax, National Insurance, or other deductions from their pay. Instead, employers handle this, and have done so for 80 years.
Following the second world war, millions of workers were paying Income Tax and the rate had increased. Previously, tax was collected annually or twice yearly, but the government wanted a more efficient way to collect revenue. So, in 1944, the government launched PAYE.
Over the years, the system has evolved; your employer might now handle deductions that cover student loan payments or pension contributions.
While PAYE may mean you don’t need to complete a tax return, it could lead to you overlooking the details of your payslip, which may affect your finances.
Next time you receive a payslip, here are three figures you may want to check.
1. Your take-home pay
When it comes to managing your day-to-day finances, understanding your income is essential.
Checking your take-home pay, especially after you’ve swapped jobs, or received a pay increase or bonus, could help ensure your budget continues to reflect your circumstances.
Factors you might not be aware of could affect your take-home pay too. For example, in January 2024, National Insurance rates were cut for employees, so the amount going into your bank could be higher than you expect.
Governments often use the start of a new tax year to bring in changes to tax policy, such as updates to Income Tax thresholds or rates. As a result, reviewing how your take-home pay changes in 2024/25 could be useful too.
2. The amount of tax you’re paying
The PAYE system means paying Income Tax is simple for most people. However, it might also mean you overlook potential mistakes and end up paying too much.
Indeed, MoneySavingExpert warns millions of people are affected by tax errors every year. So, before putting aside your payslip next month, take a few minutes to look at your tax code and the deductions.
The letters in your tax code refer to your situation and how it affects your Personal Allowance – if you’re entitled to the standard Personal Allowance, your tax code will start with “L”. The government website lists what other letters mean. The number portion of the code is the amount you can earn in the current tax year before tax is due.
If your tax code is incorrect, you can contact HMRC. While it’s often simple, it can take time and be frustrating to deal with. In some cases, you might have to wait until the end of the tax year to submit a form.
HMRC may pay interest on tax you’ve overpaid, but at a rate of just 0.5%, it’s significantly below the rate you could secure with an easy-access savings account. So, spotting mistakes quickly could mean you don’t miss out on potential interest.
It’s not just about making sure you’re not overpaying Income Tax either.
When you review your tax deductions, you might discover a way to reduce your overall tax liability. For instance, if you’re planning with your partner, could you make use of the Marriage Allowance? Or if you’re a business owner, could you supplement your salary with dividends?
If you’d like to talk about how you may be able to reduce your tax liability, please contact us.
3. The figure going into your pension
If your retirement is still years away, it can be all too easy to put off looking at your pension. Yet, the more engaged you are with your pension during your working life, the more likely you are to reach your retirement goals.
Most employees will benefit from being automatically enrolled into a pension by their employer. Deductions will usually be taken from your gross pay, and your employer will typically contribute on your behalf too.
While auto-enrolment has encouraged thousands of workers to start saving for their retirement for the first time, the minimum contribution level might not be enough to secure the future you want.
If you have a pension gap, recognising it sooner could mean you have more options to bridge it and better understand the type of retirement lifestyle you can realistically look forward to.
Putting together a long-term financial plan that considers your retirement goals while reviewing your payslip could provide you with peace of mind.
Contact us to talk about managing your finances
Whether you want to understand if you’re saving enough for your retirement or how to use your disposable income to secure your long-term goals, we could help. We’ll work with you to create a tailored financial plan that may give you confidence in your short- and long-term finances. Please contact us to arrange a meeting.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.