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Article by Rebecca O'Connor.
The first payslip you receive after graduation makes depressing reading. Fantasies of what you would do with your salary quickly evaporate when you realise that, after tax, you are left with a lot less than you were expecting.
A graduate earning an average starting salary of £13,860 will be left with £11,207 after paying £1,683 of income tax over the full year or £16.83 a week. National insurance grabs a further £970 a year, or £18.60 a week.
National insurance, which you do not pay as a student, is deducted once you are earning, via PAYE (pay as you earn). If your weekly income is between £84 and £645, you will pay Class 1 contributions, which eat up 11 per cent of your salary. Anyone earning more than £645 a week pays a further 1 per cent.
If you are self-employed, you will pay Class 2 contributions of £2.10 a week until you are earning £5,035, at which point you will pay Class 4 contributions of 8 per cent. A further 1 per cent is due on earnings above £33,540 a year.
Then there is income tax. There is a personal allowance of £5,035, below which you do not have to pay tax, but most graduates are likely to start paying the basic rate of 22 per cent, which applies to earnings up to £38,335. Earnings above this will be taxed at 40 per cent. This will also come out of your pay packet via PAYE.
You can check that you are paying the right amount at http://www.taxcentral.co.uk/. For this you will need your tax code, which will be on your payslip. The website can help to check that you are on the right tax code and find out if you are due a rebate.
Rebates may be due to graduates placed on emergency tax codes by their employers. John Whiting of Pricewaterhouse Coopers, the accountant says "Emergency tax codes are expensive because they do not take into account the personal tax allowance or the 10 per cent starting tax rate. It hits hardest those with cashflow problems and those struggling with outgoings, such as rent." The rebate should appear after a couple of months. If not, contact the tax office.
If you have paid tax abroad while travelling, there are companies, such as www.taxback.com, that will help you to claim a refund. The fee varies depending on the country. Some are worse than others at administering rebates. Mr Whiting says: "With some countries, such as America, the hassle is often not woth the amount of the rebate."
Self-employed graduates or freelances have to fill out self-assessment tax returns. The deadline for tax due between April this year and April next year is January 31, 2008. If you miss the deadline, you may incur a £100 fine. The forms can be downloaded from the Revenue & Customs website at www.hmrc.gov.uk and filed online. If you are self-employed, you will need to inform Revenue & Customs within three months of setting up the business, or face a £100 fine.
Mr Whiting says: "The message for self-employed graduates is that they can't hide from the taxman and must put aside money to pay their bill."
