15 Sep, 2020 02:49 PM
Admin Category: Business Advice,

Are You Paying the Right Amount for Your Income Tax and National Insurance?

Know all the basics regarding Income Tax and National Insurance before paying them off.

As an employee, every year you have to pay Income Tax and National Insurance on your wages through the PAYE system. In the UK, Income-tax is levied on several types of earnings such as; salaries or wages, interest on securities, income from house property, agricultural Income, income from business or profession, capital gains, and income from other sources. As an employee or an employer you also have to pay for National Insurance as a compulsory contribution to the state from your income. Therefore, it’s important to make sure you have the right tax knowledge to pay the right amount.

You’re not bound to pay taxes on your entire taxable income. Before you need to pay any Income Tax, you can earn a certain amount of income each year, known as your ‘Personal Allowance’.

How does Personal Allowance work for you?

Personal Allowance gives you a significant tax break by reducing the amount of taxable income depending on your tax history and the allowances you claimed. 

The basic Personal Allowance for the tax year 2019/20 is £12,500. You will not be liable to pay any income tax if your income is below the basic amount. Your personal allowance will be deducted from your income before paying for your income tax. The Personal Allowance will continue at £12,500 for the tax year 2020/21.

Personal allowance varies from person to person, so not everyone may get the same Personal Allowance of £12,500. For instance, if your income is over £100,000; you might get a lesser amount of personal allowance. Also, you might get paid less if you owe tax from a previous tax year. On the contrary, you might get a greater amount of  Personal Allowance if you have overpaid tax from a previous tax year. In some cases, the personal allowance may be greater if someone has either claimed a marriage allowance or a blind person’s allowance. 

How much of income tax are you liable to pay?

The amount of income tax you are liable to pay depends on two factors: 1)The amount of income that falls within each tax band and 2)The amount of income that falls above your personal allowance. The payment however varies depending on different bands indicating that the more you earn, the more income tax you have to pay to HMRC. The income tax rates and the threshold for the tax year 2019-20 are as follows:

Tax Rate (Band)

Taxable Income

Tax Rate

Personal allowance

Up to £12,500


Basic rate

£12,501 to £50,000


Higher rate

£50,001 to £150,000


Additional rate

Over £150,000


This means that the minimum income you have to earn in a year to start paying tax is £12,500 in the UK as mentioned earlier. The basic tax rate of 20% applies if you earn up to £46,350 a year. The proportionality here varies in order to encourage people to contribute a higher portion of their earnings to the Government’s treasury in taxes if they earn higher.

The calculation might take a lot of your time and energy, so insead contact your local Accountant in London to help you calculate the accurate amount within a quick period of time. At Taj Accountants we offer you a comprehensive solution for your taxation at your convenience.

Note: The tax year begins from 6th April and ends on 5th April.

What do you need to know about the National Insurance (NI) in the UK?

National insurance contributions (NICs) are payments taken from your earned income. These are tax payments which essentially aim to help you build your entitlement to certain state benefits, such as the State Pension and Maternity Allowance. You’re not bound to pay for your National Insurance every year, however you’re required to make NI contributions according to your employer’s arrangement.

You’re bound to start paying your National Insurance once you start earning above £166 per week. You can pay your NI payments by monthly, weekly or or quarterly installments based on your employee contract. Depending on your earnings you have to pay your National insurance on the rate of: 

£166 – £962= 12% for weekly earnings between 

£962 = 2% for weekly earnings above

‘Class 1’ National Insurance rate

If you’re an employee, you’ll need to pay Class 1 NICs on your earnings and additionally your employer will be required to make a secondary contribution of 13.8% of earnings above £166 a week. 

However, you will be liable to make extra NI contributions if you earn more than the regular income amounts. Additionally, once you pay that extra income as NI contribution, you can not claim that amount back even if you earn less during the other periods of the tax year.

Voluntary ‘Class 2’ National insurance rates

Voluntary Class 2 NI contributions works for business owners, self-employed or someone working in a foreign country. Class 2 NI requires you to make a weekly contribution at a flat rate of 3 per week if you earn £6,365 (the small profits threshold) for the year 2019-2020. This contribution is not mandatory for any self-employed individual who’s making profits lower than the small profit threshold. Although to increase your entitlements to state benefits, Taj Accountants advises you to pay Class 2 NI even if you are below the small profit threshold.

Voluntary ‘Class 3’ National Insurance rates

Class 3 voluntary National Insurance Contributions aims to help you get a higher State Pension by filling any gaps in your National Insurance record. Once you reach the State Pension Age or once you’ve 35 qualifying years of National Insurance contributions, you get to receive a full new State Pension. If you don't have more than 35 qualifying years of National Insurance Contributions, then you may receive a reduced State pension. At a basic level you’re required to have a minimum of 10 qualifying years of NI contributions to receive the new State Pension. From 2019-20, you can pay Class 3 contributions at a rate of £15 per week with a maximum amount payable per week. 

Voluntary ‘Class 4’ National Insurance rates

Voluntary ‘Class 4’ National Insurance is applied for self-employed individuals earning above £8,632. If your profit is above £8,632 and up to £50,000, your NI payable rate is 9%; and 2% on profits above £ 50,000.

How has National Insurance changed for employees in the 2019-20 tax year?

Rate     2018-19 Threshold          2019-20 Threshold

12%     £8,424 to £46,384           £8,632 to £50,000


2%     Over £46,384           Over £50,000

This means, if you’re a higher income earner, you’ll pay more National Insurance in 2019-20 which might eat up some of the savings you’ll make on income tax. In this case, if you have a yearly salary of £50,000, you’ll pay £4,964.16. This is a £336.64 increase over your 2018-19 tax bill.

What state benefits do you get by paying for National Insurance?

Once you start paying for National Insurance, you start to enjoy various state benefits and services as follows:

  • The State Pension
  • Unemployment benefits
  • The National Health Service (NHS)
  • Sickness and disability allowances

How does National Insurance contributions work for you?

Employees and employers are legally bound to pay NI contributions on their income be it their sick leave pay, holiday pay or maternity leave pay. You and your employer pay your NI contributions on any benefit or reward that is highly liquid. However, if a portion of your income is in the form of shares in the company you are employed with, you might be able to be exempted from the payment (this can be achieved with the help of tax-approved share schemes). You’re also not liable to make NI contributions if you are entitled to certain benefits. However, there are also exceptions to this rule where employers are required to pay NI on the monetary value of any benefits that you are entitled to.

How is Income Tax and National Insurance paid?

For Income Tax, your Personal Allowance will be spread evenly across your pay packets for the year and your employer will take out tax before giving you your pay. Your employer will know how much to take out through a system called PAYE (Pay As You Earn). At the end of the year if you find out that you have paid extra tax, you can get a refund but too little and you will have to pay extra.

In case of National Insurance, again your employer will make deductions from your pay. This is worked out on a weekly or monthly basis depending on the frequency of your payment. Unlike Income Tax refund, you cannot get back any of the National Insurance you pay extra, even if your earnings fall later in the year. 

What about the increase in the annual investment allowance?

The Annual Investment Allowance allows you to deduct from your income the full value of plant and machinery you use in your business making you pay less tax. The government has increased the Annual Investment Allowance from £200,000 to £1 million. The increase is short-term which will only last for two years. It’s high time you make a big investment and help your business expand. 

How Taj Accountants can assist you?

At Taj Accountants our expert team of accountants in East London aims to provide you spelized accounts and taxation services based on your requirements. Our specialized team intends to give you the most comprehensive accounts and taxation solutions with the highest technology along with meeting HMRC regulations. Contact us anytime for any consultancy and find out the solution  that fits your problem. 

DISCLAIMER: The purpose of the blog is to provide information and insight regarding the situation. The readers must contact experts before making any decisions based on the information. We highly appreciate you to contact Taj Accountants for further assistance.


What is the purpose of Income Tax collection?

Every year you’re bound to pay Income Tax to the Her Majesty’s Revenue and Collections (HMRC) department. The Income Tax is collected to reinvest in the public service sector which is used to improve public projects like infrastructure development, real estate, railways, public parks, etc. In the tax year 2018-19 alone HMRC collected £627.9 Billion in tax revenues, up 3.6% to the previous year. 

What about your personal allowance if you earn over £100, 000?

For individuals earning above £100, 000, with an allowance of £12,500 there will be a deduction of £1 for every £2 you earn. If you earn £125,000, there will be no tax-free allowance, and you will have to pay income tax on the entire amount you earn.

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