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Income tax is deducted by an employer from the gross salary of an employee according to the inland revenue tax percentage applicable to those earnings taking into account personal tax allowances and reliefs available.Income Tax percentage rates for EmployeesAll employers in the UK pay employees through the inland revenue tax PAYE system and are required to deduct both tax on income and national insurance contributions from the gross wages. The net wages received are by the employee after the PAYE deductions.Gross pay is the total amount the employee has earned in that pay period including the basic wages plus any tips or bonuses received but excluding non taxable expenses. The gross pay on which an employee is assessed from tax and national insurance includes taxable benefits received by that employee such as private medical care or the provision of a company car. Non taxable expenses being business expenses the employee has incurred carrying out the duties which are reimbursed by the employer.Having established the total gross pay the employer calculates how much is tax on income and deducts tax on a cumulative basis taking into account the employee personal allowance indicated by the tax code. Business expenses incurred by an employee which are not reimbursed by an employer may be claimed as a tax relief. Such items might include the difference between the UK allowance on mileage of 40p per mile and the amount paid by an employer is less than 40p and also working from home expenses.The tax code tells the employer how much is the UK allowance to free pay the employee is entitled to in the financial year. For example a 2008 tax code of 603L would indicate annual tax free earnings of £6,035. That does not mean the employee will not be deducted tax until earnings reach that figure as when calculating the tax on income the employer is required to spread the tax free allowance evenly over the pay periods.On earnings above the tax free allowance the 2008 tax percentage is 20 per cent up to what is known as the higher earnings threshold which under 2008 tax rules is £34,800 per annum. Gross salary which is above the higher earnings threshold is subject to a 2008 tax rate of 40 per cent.In addition to the tax on income deducted by an employer under the tax inland revenue PAYE scheme other income is also taxable and declared on the annual tax income returns. Items declared on the income returns would include income from savings, dividend income, pension and trust income, any rental income and self employed earnings. Working tax credits are not classed as taxable income.Determining how much is tax on income from savings is achieved by applying the income tax percentage applicable after deducting gross earnings from the tax inland revenue threshold limits. If non savings income is less than the £2320 starting rate for savings or if savings and dividend income is the only source of income then the savings income tax percentage is 10 per cent up to the £2,320. If non savings income is above the starting rate then all of savings are taxed at the 20 per cent basic rate.When earnings exceed the higher tax threshold of £34,800 the income tax percentage on savings increases from 20 per cent to 40 per cent and on dividends from 10 per cent to 32.5 per cent. In effect how much is tax is determined by the highest tax percentage applicable to income.National Insurance for EmployeesWhile tax on income is calculated on a cumulative basis national insurance contributions are calculated as a percentage of gross salary in a specific pay period under the tax inland revenue system.Employees under the age of 16 or over the national pension age of 65 do not pay national insurance, they are exempt. There are other circumstances where an employee pays a different rate of national insurance. For example a married woman who is widowed and possess a certificate may pay national contributions at the rate of 4.85 per cent of gross wages on earnings above the primary starting threshold. Employees with a second job where the earnings are above the upper earnings threshold would only pay 1 per cent insurance.For most people who are employed the national insurance contribution is according to the rates set in table a and the amount payable is 11 per cent of gross earnings about the primary threshold and on all earnings up to the upper earnings threshold from which point the percentage drops to 1 per cent. In 2008-09 the primary threshold is £105 per week.