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Understanding tax, National Insurance and pensions

How you pay tax and set up a pension depends on whether you are an employee or self-employed.

Tax and National Insurance

Employees

You’ll pay income tax and National Insurance on your wages through the PAYE system.  

You can earn a certain amount of income each year, called your personal allowance, before you need to pay any income tax.  

In general, everyone gets the same personal allowance of £12,500 for the tax year 2019/20. 

You pay National Insurance contributions if you earn more than £162 a week.

The GOV.UK website has more information about taxes.

Self-employed

You’ll usually pay one of two types of National Insurance:

  • Class 2 if your profits are £6,365 or more a year  
  • Class 4 if your profits are £8,632 or more a year  

You’ll find more information on National Insurance rates at the GOV.UK website.

You’re entitled to the same tax-free personal allowance as an employee – see the section above for details.

Pensions

Employees

The law states that employers must automatically enrol their employees into a workplace pension scheme. 

They should enrol you if:

  • You are not already in a workplace pension scheme or they have not yet done it 
  • You are between 22 and state pension age
  • You earn more than £10,000 a year
  • You usually work in the UK

You’ll pay into the scheme and so will your boss once you’re enrolled. 

You may also get tax relief from the government. You can opt out of the pension scheme, but you’ll lose the employer and government contributions. 

The Department for Work and Pensions has more information about workplace pensions.

Self-employed

You’re not required by law to be part of a workplace pension scheme and it’s up to you to start a pension if you wish to do so. 

Pension saving an important consideration if you’re self-employed.

They can come with some unique benefits, including: 

  • Pension tax relief
  • Favourable inheritance tax implications
  • More control what to do with your pension savings at retirement age 

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