How is Tax and National Insurance Calculated?

How is Tax and National Insurance Calculated?
How is Tax and National Insurance Calculated?How is Tax and National Insurance Calculated?

What’s the money used for?

The money raised in taxation is used by the Government to run the country and fund essential services. The NHS, for example, is funded mainly through taxation, with a small proportion funded by National Insurance and money raised for charges like prescriptions, private patient care and dental charges.

National Insurance contributions, known as NICs, pay the benefits when people retire, are unemployed or unable to work because of illness.


Do I have to pay Tax?

Income tax is payable on most types of income and, if a person is employed, tax is calculated by the employer and deducted ‘at source.’ This means the deductions are made at the time of running payroll and employees receive their salary with both tax and national insurance already deducted. The employer has the legal responsibility to make payment of these deductions to Her Majesty’s Revenue and Customs (’HMRC’) on the employee's behalf.

Income tax is not only payable on salary from work, but it’s also applicable on profits from a business, rent from property and interest and dividends from saving and investments.

Income tax isn’t applicable for 100% of income earned by an individual. Each person has a tax-free allowance or threshold, known as the Personal Allowance. In the 2022/23 tax year, the Personal Allowance is £12,570 per year. This is split across 12 months, so calculates as £1047.5 per month tax-free income per month.

Example: An employee earning £24,000 per year, paid monthly, receives £2000 per month gross pay. Their Personal Allowance is £1047.5 per month which means the employee is liable to pay income tax on the balance of £952.50. The taxation rate for this is 20%, giving a total tax payable of £190.50.

The basic rate of tax of 20% is applicable on income from £12, 571 to £50, 270. Once earnings exceed £50,270, a new rate of income tax is charged on those earnings above that threshold. For Higher rate taxpayers, the rate is 40% and this applies to income in the bracket of £50,271 to £150,000 per year. Over £150,000 per year, the Additional rate of tax is 45%.

An employee who earns £100,000, for example, will have their tax-free Personal Allowance (if applicable), then pay 20% on earnings in the basic rate band and 40% on income in the Higher rate band.


Band                                    TaxableIncome                Tax rate

Personal Allowance         Upto £12,570                   0%

Basic rate                           £12,571to £50,270         20%

Higher rate                        £50,271to £150,000       40%

Additional rate                 over£150,001                   45%

The income threshold for the Personal Allowance is £100,000 per year (£8,333.33 per month). If an individual earns above the threshold of £100,000 per year, the Personal Allowance is reduced by £1 for every £2 earned above it, until it reaches £0, meaning tax is applicable on all income for higher earners.

When a person receives benefits as part of their employment– such as a company car, private healthcare or gym membership – this also reduces the Personal Allowance.


Do I have to pay National Insurance?

Payment of National Insurance is also applicable on most types of employment. Once again, there is a Personal Allowance which is free from liability of payment, and this is to benefit particularly those in the lowest income brackets. The Personal Allowance is £242 per week.

Once that threshold has been exceeded, NICs become liable on salaries and wages and a higher rate is paid on the first band of income.

There are different classes of National Insurance contributions. For the purpose of this example, we’ll calculate using Class 1 NICs, which is the most common form of contributions for those who are employed.

The contribution rates for most people for the 2022 to 2023 tax yearare:

Income                                              Class1 NIC rate

£242 to £967 per week                 13.25%

Over £967.01 per week                 3.25%


If you earn £1,000 in a week you’ll pay:

  • nothing     on the first £242
  • 13.25%     (£96.06) on your earnings between £242.01 and £967
  • 3.25%     (£1.07) on the remaining earnings above £967

This means your National Insurance payment will be £97.13 for the week.

How does PayCaptain help?

PayCaptain provides fully interactive graphical payslips on the PayCaptain mobile app.

The employee payslips have help icons for both Tax and NIC calculations. These explain the calculations is real time, depending on the actual figures for the employee's salary, rather that just a static graphic. This helps the employees by showing the calculations specific to their own pay.

For employees who need further assistance in understanding the deductions made to their salary, help is on hand from the PayCaptain team. The team can be contacted by video, phone or WhatsApp to have their questions answered. ThePayCaptain payroll team embraces the latest technologies to be able to provide a best-in-class bureau service. When an employee phones PayCaptain, their most recent payslip automatically pops up on screen before the call is answered, meaning all the relevant information is in front of the support team, so they can answer queries quicker.  

In summary, PayCaptain is a solution that gives employees the information and support they need to understand their pay. Combined with a host of innovative features to help employees struggling with debt, the PayCaptain app gives employees increased control over their finances, as well as offering more support in times of financial hardship.

To learn more about how PayCaptain can help your business and improve the financial well-being of your employees, please contact us for an informal, no-obligation chat. We’ll be happy to demo PayCaptain for you.

PayCaptain Payroll Solutions Limited, is an HR/FinTech company that delivers a fully automated cloud payroll service. The solution contains many unique and innovative features for employees, helping them to take control of their pay and increase their financial well-being. PayCaptain is a payroll solution that helps employers pay their workforce, regardless of their income and personal circumstances. The solution also incorporates functionality that's specifically designed to positively impact the financial resilience for people struggling with money, or vulnerable and low-income employees.

PayCaptain is the world’s first payroll company to be B-Corporation certified. To read more about B-Corporations, visit PayCaptain has been recognised and rewarded with two B Corp ‘Best for the World’ awards for being within the top 5% of highest scorers within both the Workers and Governance impact areas in the B Corporation B Impact Assessment.