# Understanding Salary Deductions and Taxes



## tpiper (Jan 27, 2011)

My wife and I are in the early stages of planning a move to the UK, and I would like to get some advice on what to expect when it comes to what all will be pulled out of our paychecks and in general how the tax system works. I have a spreadsheet set up, so I will do my best to describe each line item and the formula used:

- *BASE SALARY* - annual gross salary
- *RETIREMENT *- I have not looked into this too much, but do contributions in the UK work about the same as in America? (i.e. anything put into a 401K is pretax). Under the assumption that it does, I planned on a 5% contribution.
- *NATIONAL INSURANCE* - I believe the formula I found was any amount over 110GBP per week is taxed at an .11 cent rate. I know there is a upper threshold where anything above is taxed an extra penny more or something, but I am pretty sure we will not reach that level. So the formula I used was 

(((BASE SALARY / 52 WEEKS) - 110) * .11) * 52 WEEKS

I know it is not necessary to divide out the 52 weeks and then multiply it back in at the end, but it was just quicker to figure it that way and it works.
- *TAXABLE INCOME* - by subtracting out the retirement and national insurance, I get my taxable income.
- *TAXES* - since it is not over the ~37K threshold, I use the 20% tax rate.

So to look at a hypothetical summary:

SALARY: 20,000
RETIREMENT: 1,000
NATIONAL INSURANCE: 1,570.80
TAXABLE INCOME: 17,429.20
TAXES: 3,485.84

MONTHLY TAKE HOME: 1,161.95

I apologize if this sounds confusing or is all over the place. But if anyone can look at that and advise if I am leaving anything out that may affect the amount I take home, I would greatly appreciate it.

Regards,

Travis


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## Joppa (Sep 7, 2009)

tpiper said:


> My wife and I are in the early stages of planning a move to the UK, and I would like to get some advice on what to expect when it comes to what all will be pulled out of our paychecks and in general how the tax system works. I have a spreadsheet set up, so I will do my best to describe each line item and the formula used:
> 
> - *BASE SALARY* - annual gross salary
> - *RETIREMENT *- I have not looked into this too much, but do contributions in the UK work about the same as in America? (i.e. anything put into a 401K is pretax). Under the assumption that it does, I planned on a 5% contribution.
> ...


It's tricky to work out your precise take-home pay, because as well as tax rates (20% in your case), there is personal allowance (the amount you can earn without paying tax, currently £6475). For NI, the whole of your pay is subject to deductions at 11%. 
It's much easier to use a Net Pay Calculator like UK PAYE Income Tax Calculator 2010 salary calculator UK. Updated for 2010 / 2011 tax year. Calculate wages pension national insurance and student loan repayments online.. Inputting your data, your net monthly pay is £1243.68. In your calculations, you didn't allow for tax-free allowance and you deducted NI contributions from your taxable pay - in fact you pay NI from your taxed income.
You can't normally join company pension scheme until you have worked 6 months to a year. Also depending on your future plans, paying into a UK company pension may not be the most efficient way to plan for retirement. Take professional advice.


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## tpiper (Jan 27, 2011)

Thanks Joppa. I made a couple revisions to the spreadsheet I have, but for the most part it was on par with the listentotaxman calculator. Thanks again for that link. And I know I won't be planning down to the penny, but the spreadsheet helps keep all expenses in perspective for me and I really just wanted to make sure there was not some additional tax that I was not taking into consideration.

And as far as the pension, I was not sure if they would allow me to pay into my 401K that I currently pay into. If not, no big deal.


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## Joppa (Sep 7, 2009)

tpiper said:


> Thanks Joppa. I made a couple revisions to the spreadsheet I have, but for the most part it was on par with the listentotaxman calculator. Thanks again for that link. And I know I won't be planning down to the penny, but the spreadsheet helps keep all expenses in perspective for me and I really just wanted to make sure there was not some additional tax that I was not taking into consideration.
> 
> And as far as the pension, I was not sure if they would allow me to pay into my 401K that I currently pay into. If not, no big deal.


For 2010-11 tax year (ends in April), you can contribute up to £255k without tax penalty so it's pretty close to $401k.
As for other taxes, you are likely to be taxed on fringe benefits, such as private medical insurance, company car etc. There is a complicated formula for working out tax liabilities, so it's best to use online calculator.


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## Bevdeforges (Nov 16, 2007)

tpiper said:


> And as far as the pension, I was not sure if they would allow me to pay into my 401K that I currently pay into. If not, no big deal.


The US 401K plans aren't terribly well known or understood outside of the US. I have heard somewhere that the UK may allow you to contribute into a foreign retirement fund like this if it's classified as equivalent to the UK self-funding retirement schemes. For information on that, you will have to check with your UK employer.

Normally, however, you can't pay into your tax-deferred US retirement funds (IRA, definitely - not so sure about the 401K) unless you have earned income that is taxed in the US. What that all means is that you can't contribute to your IRA if you're using your overseas earned income exclusion (form 2555). I looked into this a few years back and you can't even make a "non-qualified" contribution to an IRA if you don't have earned income on which you are taxed in the US. I suspect the rules are much the same for a 401K.
Cheers,
Bev


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## tpiper (Jan 27, 2011)

In looking at the Tier 2 Visa applications, the fee given is £350. Is there any additional fee if you are approved for a visa, or is the £350 all you will pay?


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## Joppa (Sep 7, 2009)

tpiper said:


> In looking at the Tier 2 Visa applications, the fee given is £350. Is there any additional fee if you are approved for a visa, or is the £350 all you will pay?


If you apply in US, you pay the $ equivalent of $560. That's all you pay generally, but if you want priority service (your application will be processed within 48 hours), the additional fee is $150.


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