Tax deduction and national insurance contributions start as soon as someone starts earning from their job. Through this article, we will explain the reasons why some individuals may feel that there are no tax deductions from their wages. Additionally, we will also explore how tax codes are assigned and tax deductions calculated by HMRC. 

Why Am I Not Paying Tax At My New Job?

One reason that you are not paying tax at your new job is that your income is less than or equal to your Personal Allowance amount of £12,750.

Another reason could be that under the Pay As You Earn (PAYE) system, your employer has already deducted taxes before paying you your earnings. You will find details on this printed on your payslip.

If you are starting to work for the first time, you will not have a P45 as other employees do and will be asked to fill out a Starter Checklist (previously known as the P46) by your employer. The following information will be asked in this checklist:

  • your NINO
  • if you have been claiming jobseeker’s allowance or employment and support allowance before starting a job
  • if you have got a second job
  • if you are paying off a student loan

Based on the information you provide, an emergency tax code will be assigned by HMRC until a permanent one is assigned for regular tax deductions.

Sometimes individuals who have started a new job are assigned an 0T1 tax code. This is an emergency tax code that is assigned on a temporary basis to individuals either when they have started a new job or they haven’t updated their details with HMRC.

There are many reasons why an OT1 tax code with M or W extensions are assigned to individuals. One of the reasons may be that you have no tax free allowance remaining which may be exempted from income tax. Another reason could be that you’ve recently started a new job. Due to this, you have not been able to give your employer your old P45 and you haven’t submitted your P46 as yet. 

This means that taxpayers living in England will be charged as follows:

  • 20% tax on income up to £37,500
  • 40% tax on income between £37,501 and £150,000 
  • 45% tax on income above £150,000

You can check your income tax calculations online through the HM Revenue and Customs website. If you are employed in more than one job, you will have to conduct multiple calculations to have an estimate for income tax deductions for each source of earnings.

To confirm your tax code, you can check any of the below-listed documents:

  • Payslip
  • P45 form
  • P60
  • PAYE coding notice
  • Pension advice slip
  • HMRC website

What Is Personal Allowance?

When you are working in the UK, there is a certain amount of your income that remains tax-free as it is considered to be a Personal Allowance. The amount set for Personal Allowance during the 2021-2022 tax period is £12,750. 

Your personal allowance is applicable on your combined incomes from different sources. However, for the purpose of tax deduction, your main or primary job, which is also the source of a higher income is considered for Personal Allowance deduction prior to a tax rate being applied.

Since you get Personal Allowance once (it does not apply to each individual source of income), it may be in your own interest to have it applied to your main job and not the second one. However, if someone works two jobs and their cumulative income is less than the Personal Allowance amount of £12,750, they can have it spilt across both incomes. Sometimes a second job may increase your tax bracket which leads to a higher tax deduction on your income with an insignificant impact on your take-home salary.

Your second job is usually considered to be the one that provides a lower income than the first one and there is no consideration for Personal Allowance since it has already been accounted for. The reason is that the HMRC divides your total income by sources to calculate the amount of tax that is due on your cumulative income.

What Are Tax Codes?

Tax codes are a combination of letters and numbers that determine the amount of income tax due on an individual. While the letters indicate your financial position and how it relates to your personal allowance, the numbers tell your employer pr pension provider the amount of tax-free income that you are eligible for in that tax year. 

For instance, 1257L (currently the most common 2021-22 tax code in the UK) refers to the new Personal Allowance rate for 2021-22, which is £12,570 and the letter “L” indicates that the individual is entitled to this amount of tax-free income. Any taxes that are to be charged will be above additional amounts beyond this figure.

How Are Tax Codes Assigned?

The following steps are followed by the authorities while assigning tax codes:

  • Step 1: Your tax allowances are calculated. In most cases, this is an individual’s personal allowance added to any other allowances and job expenses.
  • Step 2: Your deductions are calculated. These are incomes for which tax has not been paid and may include any part-time work or certain state benefits.
  • Step 3: The deductions are subtracted from the tax allowances. The result is your pre-tax income. If this amount equals personal allowance, your income remains tax-free.

How Are Tax Identification Numbers Used In The UK?

Tax identification numbers are used to track and monitor the tax accounts of individuals. Although the term TIN Number is not specifically used in the UK in its strictest sense, the HMRC issues two TIN-like numbers to members of the public. The purpose and use of these are described below:

  • The Unique Tax Payer Reference (UTR): This is a ten-digit set of numbers issued by the HMRC to individuals and businesses who qualify for paying tax returns in the UK. You will find this number on the front page of the tax return (form SA100 or CT600). In addition to this, you will find it on a “Notice to complete Tax Return” (form SA316 or CT603) or a Statement of Account. It is also printed next to the headings of “Tax Reference”, “UTR” or “Official Use”; but the appearance and terms that are used will depend on the type of document issued. 
  • The National Insurance Number (NINO): This includes two letters which are followed by six numbers and then only one of the letters between A, B, C and D. Individuals residing in the UK will be issued a NINO once they are 16 years of age. They will be informed by the Department for Work and Pensions (DWP) or the HMRC. If you are an employee, you will find this number on your payslip as well as on a Statement of Account issued by HMRC. It links individuals to their records of national insurance contributions, tax payments, student loans as well as social security benefits.

How Much Tax Do I Have To Pay In The UK?

According to a general estimate, an individual pays one-third of their income in the form of taxes in the UK. While the amount of tax one pays depends on the scale of their income, some people will pay a higher tax perhaps due to the property that they own or inheritance that they may receive.

There are different types of taxes under the UK taxation system. Direct taxes include PAYE (Pay As You Earn) and National Insurance. These account for 20 per cent of an individual’s income. On the other hand, indirect taxes include VAT, council tax as well as duties on alcohol and petrol. 

Basic taxes in the UK include the following:

  • Income Taxes 
  • Property Taxes 
  • Capital Gains 
  • UK Inheritance Taxes 
  • Value Added Tax 

These are all progressive taxes; which means that the scale of tax increases with an increase in income.

How Much Income Tax Do I Have To Pay In The UK?

Incomes above the minimum cap are taxed at an incremental rate of 20 per cent to 45 per cent depending on whether an individual belongs to the basic, higher or additional tax rate band. Below are details of these bands:

  • 0 per cent income tax when income is up to £12,570
  • 20 per cent income tax when income is between £12,571 and £50,270 
  • 40 per cent income tax when income is between £50,271 and £150,000 
  • 45 per cent income tax when income is above £150,001

Conclusion:

In the rare case that an individual may believe that there are no tax deductions from their income, the main reason could be that their income is less than the amount of personal allowance assigned for that year by HMRC or their employer has deducted tax from their wages under the PAYE system. Sometimes new employees are assigned an emergency tax code while their personal information is being updated with the HMRC. In such cases, they will be assigned a non-cumulative tax code pertaining to the period of their current employment only. All these details are available on an employee’s payslip. 

FAQs: Why Am I Not Paying Tax At My New Job?

Do I pay tax when I start a new job?

Yes, you start paying tax as soon as you start a new job. In most cases, workers are under the PAYE system. This means that the employer directly deducts tax from their wages before transferring earnings to workers.

Why do I not pay tax on my wages?

If your income is less than or equal to the personal allowance amount, you will not pay tax on your wages.

Do I pay tax on my first job in the UK?

Yes, you pay tax if it is your first job in the UK; as long as your earnings are above the personal allowance amount of £12,750.

What if my employer has not deducted tax?

If your employer has not deducted tax under the PAYE system, the HMRC will demand the due amount of tax and NI contribution directly from you at a later date.

Can you go to jail for not paying taxes in the UK?

Yes, you can be sentenced to jail or face heavy fines for not paying taxes in the UK. A tax evasion conviction can lead to a jail term of six months and a fine of £5,000.

References:

First-time workers | Low Incomes Tax Reform Group

Starting your first job – How does it work? – BBC Bitesize

Emergency tax codes – Which?

What Is an OT Tax Code? | Tax Rebate Services.

What your tax code means – GOV.UK

Tax codes – GOV.UK

HM Revenue & Customs – GOV.UK

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