Income Tax

You pay tax on your wages through a system called Pay As You Earn (PAYE). Your employer uses this system to deduct Income Tax and National Insurance contributions from your wages before they pay you.

1.0 - Gross and net salary

The amount you earn before tax is deducted is your 'gross salary'. The amount you get after tax and National Insurance has been deducted is your 'net salary'. When you get a payslip, you'll see:

Tthe 'gross salary' you've earned (including any bonuses)
How much Income Tax has been deducted
Any National Insurance contributions that have been deducted
Your take home pay, or the 'net salary' you've actually received

As well as being taxed on your pay, you're also taxed on benefits your employer provides, such as a company car, a low interest loan or medical insurance. You may also have to pay tax on tips you receive as part of your job.

2.0 - Income Tax

Income Tax is your contribution to government spending on things like transport, health and education. How much you pay depends on how much you earn.

HM Revenue and Customs (HMRC) gives you a 'tax code', which you'll see on your payslip. Your employer uses your tax code to work out how much Income Tax to take off your wages through the PAYE system.

At the end of each tax year your employer will give you a form - your P60 - showing your total gross pay for the year and how much tax you've paid.

2.1 - National Insurance contributions

You pay National Insurance contributions to build up your entitlement to a State Pension and other social security benefits. How much you pay depends on how much you earn. Your employer deducts Class 1 National Insurance contributions from your wages through the PAYE system.

HMRC keeps track of your contributions through your National Insurance number. This is like an account number and yours is unique to you.

3.0 - How much can you earn without paying tax and National Insurance?

3.1 - Income Tax

Everyone can earn a certain amount each year without paying any Income Tax. This is called your 'personal allowance'. In 2007-2008 the personal allowance is £5,225. Some people can earn a bit more before they start paying tax, if they're over 65, for example.

3.2 - National Insurance

You can earn up to £100 a week (2007-2008) before you pay any National Insurance contributions. This is known as the 'primary threshold'.

As long as you earn more than £87 a week (2007-2008) you can still build up your entitlement to a State Pension and certain other benefits. This is known as the 'lower earnings limit'.