Tax and Starting Your First Job
03rd March 2020
Getting started in your first job is a big step, and it takes some thinking through to get it right. One of the biggest considerations is getting your tax situation straight.
What is Pay as you Earn?
The PAYE (Pay as your Earn) scheme is how most UK workers pay the tax they owe on the income they earn from working. HMRC will issue you with a tax code to enable your employer to correctly calculate how much tax to deduct from your wages.
The Pay As You Earn (PAYE) system does a decent job of taking most of the work off your hands, but you can't always afford to assume that everything's being handled properly for you. Here's a quick guide to taking your first steps into the PAYE workforce.
Income Tax and National Insurance Contributions
When we talk about the Pay As You Earn system, we're really talking about how money gets sucked out of your pay packet before you get it. That missing cash goes toward your Income Tax and National Insurance Contributions (NICs). Self-employed people have to deal with these things themselves, but the PAYE system is designed to make everything as simple and automatic as possible.
When do I pay Income Tax?
The first thing to know about PAYE is that not every penny you make will get taxed. Most people get a Personal Allowance, with tells HMRC how much you can earn before anything is taken off. For the 2021/22 tax year, for example, the standard Personal Allowance is £12,570. Anything you make below this threshold is tax-free. Anything over that is taxed at the basic rate until you hit the threshold for higher rate tax.
With National Insurance, the same basic rules apply. What you owe depends on how much you make, and the contributions are taken automatically by your employer and sent to HMRC. Your NICs are used to qualify you for things like the State Pension.
What are the Tax Rates?
Depending on your income, you will be taxed in accordance with the UK Tax Band system:
Band: Personal Allowance - Taxable Income (Up to £12,570) - Tax Rate: 0%
Band: Basic Rate - Taxable Income (£12,571 to £50,270) - Tax Rate: 20%
Band: Higher Rate - Taxable Income (£50,271 to £150,000) - Tax Rate: 40%
Band: Additional Rate - Taxable Income (Over £150,000) - Tax Rate: 45%
Your first job: getting the paperwork right
The basic documents you should keep hold of are your PAYE forms and your payslips. This is the kind of paperwork you might need for claiming back any tax refunds you're owed each year – but they're also just generally useful things to keep track of. You can keep the original paper forms or make digital copies for your records. Either's generally fine as long as you know where to find them in a pinch.
For your first PAYE job, you should be asked to fill in a “Starter Checklist” to help determine your tax code. That code's important, and it might change over time so you need to keep an eye on it. You'll find your tax code on a lot of your HMRC documents, like your P45 (a form you get when you leave a job) or P60 (a yearly round-up of your earnings and tax).
Paying too much tax
It's not uncommon for people to end up overpaying their tax, whether they realise it or not. Sometimes, HMRC will notice on its own and send you a P800 tax calculation to let you know. They'll generally be able to sort you out a refund without you having to chase them over it. However, if you're paying certain kinds of work expenses or if you stop work part-way through the tax year, things can get trickier. In those cases, you'll often need to claim back the tax you're owed yourself - and provide solid proof of what you're due.
Taking the example of work travel, you can claim a tax refund on essential travel expenses to temporary workplaces. HMRC basically decided that you shouldn't pay tax on these kinds of costs. You do have to be footing the bill yourself, though. If your employer's paying up-front or fully reimbursing you afterwards, you can't claim any tax relief.
Don't ignore any tax rebates you might be due. Over a year, depending on the kind of work you do, the amount you're owed can stack up to many hundreds of pounds. Millions of pounds in unclaimed tax refunds are lost each year, vanishing into the taxman's bottomless pockets. Don't let your cash go to waste like this.
There's another side to the tax coin, of course. If you're on the wrong tax code, you could easily find yourself paying less tax than you should. This is a bad situation to be in, and the longer you leave it before sorting it out the worse it'll get when HMRC catches up to you. Always check your tax code, and kick up a fuss if it looks wrong. In the taxman's eyes, even if the mistake wasn't yours in the first place, it's entirely your responsibility to sort it out.
Jobseeker’s Allowance and Employment and Support Allowance
When you start work after claiming JSA or ESA, the tax you've paid will be calculated by the Department for Work and Pensions (DWP). If you've paid too much, they'll arrange a refund.
Tax and your Second Job
Each PAYE job you have comes with its own tax code. Generally, only one of your jobs will have your tax-free Personal Allowance attached to it, while the other will be taxed at the basic rate from the first penny. This can get messy if both your jobs are low paying, or if your combined income hits the higher rate tax threshold, so keep an eye on your tax codes and let HMRC know if you're either not getting the full benefit of your Personal Allowance or if your income means you should be paying some of your tax at the higher rate.
Leaving or changing jobs
When you leave a PAYE job, you should get a P45 form to show what tax you've paid so far this tax year. Hold onto this, since any new employer will need it to keep your tax code straight. If you leave a job and end up on benefits, you'll need your P45 to show the Department for Work and Pensions. They'll use it to sort out any refunds you're owed.
Student Loan Repayments
The PAYE system generally takes care of any Student Loan repayments you have to make, alongside your Income Tax and National Insurance Contributions. You'll see the deductions made when you check your payslips, so hang onto them in case there's ever a problem to fix.
A pension is basically just a way of saving money throughout your working life. You get tax relief on your pension contributions to encourage you to save, and most employers are required by law to have a workplace pension scheme in place for their employees. Pensions are a massive topic to cover, so it's a good idea to get professional advice on saving for your future.
The Universal Credit system rolls 6 other, older benefits into one. It's there to support people who are caring for children, living with disability or on lower incomes. You need to make a claim to get the benefit, and what you get will depend on your situation. If you're starting work, your Universal Credit will tend to drop as your income goes up.
The basic tax paperwork you should keep includes things like:
- Payslips and PAYE documents.
- Details of any expenses you can claim tax relief for.
- Any benefits in kind you get (things like company cars, for example).
- Details of state benefits or workplace pension schemes.
Whatever paperwork you keep, you should hang onto it for at least 22 months after the tax year ends.
Can I Get Help with My Tax Paperwork?
Absolutely! RIFT has over 20 years of experience with tax rebates and tax returns. That makes us the UK's leading experts in helping people understand and improve their tax situation. Get in touch with us if you need our help.