1. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.1 Chapter 21 Employees’ pay

2. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.2 Learning objectives After you have studied this chapter, you should be able to:  Explain the basic system of PAYE income tax  Explain the difference between employee’s and employer’s National Insurance Contributions  Calculate the net pay of an employee given details of his or her gross pay and PAYE income tax and other deductions

3. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.3 Learning objectives (Continued)  Calculate the amount of the employer’s National Insurance Contribution that would have to be paid on behalf of an employee given details of the employee’s gross pay and PAYE income tax and other deductions  Explain how basic pensions and additional pensions are determined  Operate a wages control account

4. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.4 Pay  Employees are paid either a wage or a salary.  Generally wages are paid weekly, stated per hour, and salaries are paid monthly, stated per year.  Every employee is taxed under a system called PAYE (Pay As You Earn).  Employees also pay National Insurance Contributions.

5. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.5 Calculating gross pay The main methods for calculating gross pay include:  A fixed amount per period of time  Piece rate  Commission  Basic hourly rate There may also be payments for overtime and bonuses.

6. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.6 Income tax deductions  In the UK, employees are liable to pay income tax.  The employer calculates what income tax is due and sends it to HM Revenue and Customs.  Everybody in the UK is allowed to subtract an allowance from their earnings before income tax is calculated.  Extra allowances (reliefs) are given to the blind, the elderly and people in certain jobs.  Individuals are given a tax code to indicate their total personal allowance.

7. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.7 Tax calculations Therefore the calculation to see how much income will suffer income tax is:

8. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.8 National Insurance  Employees also pay National Insurance Contributions (NICs).  Payment of NICs entitle you to the receipt of some benefits.  Employee’s NICs are deducted from gross pay, just as income tax is.  Employers also pay NIC’s for their employees but these are not deducted from pay.

9. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.9 Pensions  Paying sufficient NICs entitles employees to receive a state pension when they retire.  An employee may belong to an occupational pension scheme (run by their employer) or a personal pension scheme (that they have chosen themselves) in which case they pay lower levels of NICs.  Some employers will contribute to an occupational or personal pension scheme for the employee.

10. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.10 Other deductions  Pension contributions  Charitable donations  Subscriptions to a social club  Union subscriptions  Payments to a Save as you earn (SAYE) scheme

11. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.11 SSP and SMP  SSP (Statutory Sick Pay) is a payment made to employees when they are ill and absent from work.  It is not paid for the first 3 days and is limited to 28 weeks.  SMP (Statutory Maternity Pay) is a payment made for up to 39 weeks to an employee away from work on maternity leave.  Both payments are subject to income tax and NICs being deducted.

12. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.12 Learning outcomes You should have now learnt: 1. That the PAYE system ensures that employees pay tax on their earnings 2. That the amount of tax paid varies between employees and depends on their eligibility for the various relief’s available 3. That tax codes are used by employers to calculate tax due by employees

13. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.13 Learning outcomes (Continued) 4. That National Insurance Contributions are deducted from earnings at the same time as income tax 5. That superannuation (i.e. pension) contributions are deducted from earnings to find taxable pay 6. That the level of state pension is dependent upon the individual having paid sufficient employee’s National Insurance Contributions before reaching retirement age

14. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th Edition, © Pearson Education Limited 2012 Slide 21.14 Learning outcomes (Continued) 7. That employees who are members of a superannuation (or occupational pension) scheme pay lower levels of National Insurance Contributions 8. That employers pay an employer’s National Insurance Contribution on behalf of each employee 9. How to calculate net pay given the gross pay, PAYE and NIC amounts 10. How to operate a wages control account