1. Find out your tax code
For example if you have the standard 1257L code, that means you are entitled to a tax free portion of income before tax is applied to the earnings. From the very first pound that you earn. When there is no tax and no NI, the way pocket money used to be when you were a child, if you earn £1, that means you get £1. However, working life is not so. So, let's do this very simple calculation to see if you are being paid correctly.
2. Divide the numeric code by 12
Take your 1257L or whatever the numeric part of the tax code is and divide it by 12. 1257/12 = 104.75
3. Multiply the result above by 10
Take the result of step 2 and multiply the number by 10. Eg. 104.75 x 10 = 1047.5. This means on the 1257L tax code, you are getting £1047.50 part of your earnings tax free. After that, you will start to pay basic rate of 20%. So when your income hits £1048.50, the last pound is taxed at 20% meaning you will only get 80% of it, or 80 pence.
It's important to note that employee NI kicks in at £823 and is 13.25% until July 6, when the threshold for NI and the tax free allowance is harmonised.
4. The resulting number is the monthly tax free allowance
After July, your earnings of £1047.50 are tax and NI free. However, if you are an employer and am looking at paying an employee you will still have to pay employer NI, which starts at £758 and is 15.05%.
5. Working out employer costs
If you are looking at hiring someone, then you will have to ensure you are paying the minimum living wage of £9.50. You will have to check if you have to pay pension contributions under autoenrolment. These stipulate a minimum of 3% for the employer and 5% for the employee and a total of 8%. If you as an employer pay more than 3%, you can do so voluntarily and enable the employee to pay less than 5%, however, the total must always be a minimum of 8%. You will also need to take into account employer NI, which is 15.05% after £758 (depending on the NI code). Check all thresholds here.
Let's take the £1047.50 example to find out the total cost of employment
Before July 6 2022
£1047.50 - salary to employee (Min wage is £9.50 / hr)
Employee NI - 1047.50 - 823 = £224.50, take 13.25% of that = £29.75
So the employee gets £1017.75.
Let's work out the employer PAYE bill now
Your PAYE bill for the said employee will be £43.45 + the employee NI (which you deducted before paying your employee) £29.75, so that makes a total of £73.20
After July 6, there will be no employee NI due on this example so your PAYE bill will be £43.56.
The total cost of employing an employee at £1047.50 a month is:
£1047.50 + £43.56 = £1091.06
6. Pension contribution
If there is a pension contribution due, then first thing to do is workout what the qualifying amount is (the amount above which pension is earned), which works similar to the way a tax free amount works for the employee.
Assuming the standard qualifying earnings count, in 2022, it is £520. This means after £520, the 8% min pension contribution kicks in. Assuming you as the employer give 3% as a minimum, and the employee pays 5%, then this is calculated as follows.
Using our prior example
Employee: 5% of £527.50 = £26.38
Employer: 3% of £527.50 = £15.83
Total contribution is: £42.20
So now we go back to the total cost of employment with the min pension contribution.
Employee now gets £1017.50 minus £26.38 = £991.12
Employer pays: £1091.06 plus £15.83 = £1106.89
7. What is the overhead of hiring this employee?
Well, the employer is paying £1106.89 and the employee is getting £991.12, so the difference is a whopping £115.77 (115.77/1047.50), or 11% of the employee gross salary. The government takes £43.56 + £29.75 and the pension overhead takes £42.20 = £115.77.
After July 5, the total employer cost is still £1106.89 but the employee will get £29.75 more, so the overhead will be £115.77 - £29.75 = £85.76, or 8.2% overhead.
And this is all before income tax is even applied!
8. Get ShiftAI's Payroll & HR software to calculate all these figures for you
Using ShiftAI's Payroll & HR software, will enable all these calculations to be done effortlessly and kept up to date. As an employer you will know how much it costs to have employees on your payroll and as an employee, you will clearly see what deductions are being made from your payslip. Another very useful feature is the <a href="/product/integrations/>integration that enables your accounting entry to be automatically created also.