1. Great Britian : Tax & National
Insurance
An elementary insight of HMRC
regulations that govern Tax and NI
administration in UK
Divya Deendyal

2. Introduction
 There are various types of taxes paid in the UK such as income tax, value added
tax, stamp duty, inheritance tax and the like. In this document we would discuss
Income tax and NI contributions.
 Income tax is paid on income and forms the main component of PAYE: Pay As
You Earn. Another component under the PAYE head is NIC, that is levied on an
employee on all payments made to him
also
 Income tax is paid on savings and investments such as – dividends from shares
and rent on any investment properties owned.

3. TAX
 Tax year in the UK runs from 6th April to 5th April of the subsequent year.
 Income tax personal allowance, is the amount up to which earnings are tax free. For the
current year 2011-2012, the personal allowance is £7,475 (under 65 years of age.)
 The table below depicts the income limit up to which an allowance of £7,475 holds good.
An income beyond £100,000 implies that for every £2 above the limit £1will be deducted
from the allowance – for example if Mr Smith earns £100,500 then his (P.A.) is reduced by
£250 which leaves him at £7,475 - £250 = £7,225.
Type of personal Tax year – 2011:2012 Income limit
allowance
Basic £7,475 £100,000

4. Tax-payers and rates
 There are 3 types of tax-payers : Basic, Higher and Additional rate tax-payers.
 Given below are rates applied to income only after personal allowance and other
tax-free allowances such as blind person’s, married couples’ and other
maintenance allowances have been subtracted corresponding to the tax bands.
 The figures will are as per the current financial year (2011-12).
Income tax band Income tax rate on non-
savings income
£0 - £35,000 20%
£35,001 - £105,000 40%
£105,001 and above 50%

5. Tax codes – indicate the amount of tax to be deducted from pay / pension. It is a
combination of numbers and alphabets which is additionally indicative of how much a
person can earn before tax deduction for a given tax year.
 Tax codes evenly spread tax-free amounts over the year so that the net amount paid,
remains relatively similar over all pay periods (weekly/monthly). This is achieved using the
‘Tax Basis’ functionality in SAP.
 Common tax codes have been described in the subsequent slides. The other codes used are
BR, D0, D1 and NT which implies that income for these codes is taxed at the Basic Rate
(20%), Higher Rate (40%) and Additional Rate (50%) rates, respectively. NT is when no
tax is levied.
 Tax codes 347L, 812L imply that the income before tax that can be levied on the employee
is £3479 or £8129 for the whole year or would be 3479/12 = £290 or 8129/12 = £677.4, if
the tax basis is not cumulative and depending on the number of pay periods for the
employee (considered 12).

6. Common tax codes
Tax codes Usage
L If you are eligible for the personal allowance 747L for the tax year
2011:2012
P If you are between 65 – 74 years of age and are eligible for the full
personal allowance
Y If you are above 74 years of age and are eligible for the full personal
allowance
T If HMRC needs to review certain income related reductions to the
personal allowances. It is like a L tax code, only that it is temporary.
K When total allowances are lesser then deductions.

7. Example: Mr Smith has a gross income of £28,800 and a tax code 117L for
2011-2012 (technical wage types included). The tax basis would be Week 1 /
Month 1.
 Tax code :117L
 Personal Allowance: 117 * 10 + 9 = 1179 (£98.25
Monthly)
 /101 - Gross : £2,400 (paid monthly)
 /121 - Taxable pay : £2,400
 Revised taxable pay (after reducing the personal allowance): £2400 -
£98.25 = £2,301.75
 Income tax band : £35000 / 12 = £2916.67
 Income tax rate : 20% only as the slab covers the whole
payment made to the employee
 /501 - Tax paid : (20/100) * £2,301.75 = £460.40

8. Example : Mr Smith has tax code K389, unlike other tax codes K denotes that the
deductions exceed the allowances and are hence added to the taxable pay as these may
account for various benefits and other excess untaxed income
 Tax code – K389
 Personal allowance – (389 * 10) + 9 = £3890 (£324.16 monthly tax basis)
 /101 - Gross pay : £5,200(monthly)
 /121 - taxable pay : £5,200
 Revised taxable pay( K code implies addition to /121) : £5,200 + £ 324.16 = £5,524.16
 Income tax band : £5,524.16 * 12 = £66,290 (For the first band at basic rate £0-
£35,000 & for the second band at the higher rate £35,001- £105,000)
 Income tax rate – 20% on £35,000 = £7000 (month tax basis : 7000/12 = 583.3)
 Income tax rate – 40% on (£66290 - £35000) £31290 = £12516 (month tax basis : 12516/12 =
1043)
 /501 - Tax paid : £583.3 + £1043 = £1626 (tax paid should never exceed more then half the gross
pay)

9. Understanding cumulative tax basis – Example. Mr Smith earns £30,000 has a
tax code 300L receives a bonus of £2,000 in December and has tax calculated
on a cumulative basis.
Period April to November (8 months)
 /101 - Gross pay : £30,000
 Tax code – 300L
 /121 - Taxable pay : £30,000 – 3009 = £26,991 (income tax band basic rate 20%)
 Income tax rate – 20% on £26,991 = £5,398.2
 /501 – Tax paid : 5398.2/12 (monthly tax) = 449.8 ~ £450
Period December to March (4 months)
 /101 – Gross pay : £32,000
 Tax code – 300L
 /121 – Taxable pay : £32,000 – 3009 = £28,991 (income tax band basic rate 20%)
 Income tax rate – 20% on 28,991 = £5,798.2
 /501 - Tax for the period = {5,798.2 – (450 * 8(April - November))}/4 = 549.55 (per month for
December - March)

10. Tax Snippets
 Tax infotype – 0065 contains the tax source (source could be any of the
following P45, P6, P9 forms and a few more), tax code, employer starter and
leaver details along with pensioner starter details.
 Cumulation class for Tax is 21
 Default tax code assigned is BR (income taxed at the basic rate)
 GTAX is the function that calculates tax during payroll run which draws values
from table – T5G01 (tax rates)
 Technical tax wage types - /515 taxable pay from other employment, /516 tax
paid other, /505 P45 taxable pay, /506 P45 tax paid
 Report RPCP45GN – creates a new tax record containing employee leaving
details when the P45 is issued, it can also be used to create a P45 form for the
leaver and simultaneously update the tax record.

11. Tax Snippets – continued …
 P45 snippets – the form is issued when leaving a current employment. P45 is a
record of tax paid to date, earnings, tax code applied, it helps a new employer
revise tax code and also make tax adjustments to calculate tax due on the first
pay day. It is a record of the tax allowances received and also useful to enable
refund of any overpayment from the HMRC and avoid paying tax in excess. The
form contains 4 parts of which part 1 is sent to HMRC. P45 is significant during
various phases of employment some such instances are – first job, changing
jobs, handling multiple jobs, leaving a job, if one is a student and working, self-
employed, starting work after claiming jobseeker’s allowance and retiring from
work altogether

12. National Insurance
 National insurance is paid when an individual is employed and wants to avail of state benefits such as state pension, job
seeker’s allowance, bereavement benefits, maternity allowance and more. One can even pay voluntary NI contributions to
extend state benefits whilst living abroad, etc. People are entitled to pay NIC until they reach 65 years of age (state
pension age).
 The national insurance number is a 9 character number such as this AB121314Z and serves as a unique
identification/reference number for the social security system, recording information on NICs and tax payments and
entitlement of state benefits.
 The amount of NICs vary based on employment conditions i.e, employed or self-employed. Employed individuals pay
Class1 contributions which is 11% of income earned between £110 & £844 per week and 1% more on all income earned
above £844.
 NI snippets
Infotype 0069 National Insurance GB
Technical wage types /131 – NIable pay
/132 – Regular NIable pay
/133 – Irregular NIable pay
/301 – Employee NI contribution
/302 – Employer NI contribution

13. NI rates

14. An insight into NI category
Employed individuals pay NICs at varied rates which is reflected through different NI category letters
such as A, B, or C. NI category helps compute employee and employer contributions. These letters are
determined by the fact that an employee is (contracted-in) or not (contracted-out) a member of the state
second pension scheme, contracted-out implies lower NI rates as they have opted out of the state second
pension.
Types of contracted-out pension schemes
• COSRS : Salary-related contracted-out scheme (lower NI rates)
• COMPS : Money-purchase contracted-out scheme (lower NI rates)
• APPS : Appropriate Personal pension
Types of contracted-in pension schemes
• CIMPS : Contracted-in money-purchase scheme
• CISRS : Contracted-in salary-related scheme

15. NI example
 T5G_NICPCT & T5G_NICLIM contain details about NIC percentages and
limits which will be used in this example so details given below :
Percentages EE ER EE ER Limits Amount
(monthly) % % rebate rebate
Lower earnings - - - - Lower earnings limit 442
limit
Secondary - - 1.6 3.7 Secondary threshold 589
threshold
Primary threshold - 10.1 1.6 - Primary threshold 602
Upper earnings 12 13.8 - - Upper earnings limit 3,540
limit
System high 2 13.8 - - System high amount 9,999,999,999,999
amount
Upper accrual 10.4 10.1 - - Upper accrual point 3,337
point

16. Monthly calculations : Assuming Ms. Kirsten’s - /131(NIable pay) is
£3127.04, lower earnings limit is £421, secondary threshold is £55 and upper
accrual point is £2651.04. Calculate /301(employee NIC) and /302(employer
NIC)
Limits Example amt Employee % Employer % Employee Employer
rebate rebate
Upto LEL : 442 421 - - - -
LEL to ST : 589 55 - - 55 * 1.6 = 0.88 55 * 3.7 = 2.03
PT to UAP : 602 2651.04 2651.04 * 10.4 = 2651.04 * 10.1 = - -
to 3,337 275.7 267.75
 /301 – 275.7 – 0.88 = £274.82
 /302 – 267.75 – 2.03 = £265.72

17. NI snippets
 0069 is the NI infotype which contains the NI category.
 Cumulation class for NI is 31
 GBNIC is the function that calculates NI during payroll run which draws values
from T5G_NICLIM (NIC limits) and T5G_NICPCT (NIC percentages)
 Default NI category depends on the choice of pension scheme of the individual
– D (monthly ) A(weekly)
 Default Leaver NI category is A.
 RPCNITG0 – NIC check report
 RPCNIRG0 – NI rates, limits and percentages report
 RPLNICG0 – NIC, CNIC, NIPAY and NIRA report
 GNICD is the feature that can be used to calculate NIC using default values
when other details are not included