UK PAYE Guide: How Salary Taxes Work 2025/26

PAYE (Pay As You Earn) is the system used by HMRC (His Majesty's Revenue and Customs) to collect income tax and National Insurance contributions directly from your salary. Instead of paying taxes at the end of the year, your employer withholds them automatically from each paycheck and sends them to the government.

This system has existed since 1944 and is how the vast majority of workers in the UK pay their taxes. If you are an employee (not self-employed), your employer is legally responsible for operating PAYE and ensuring the correct amounts are withheld.

The PAYE system includes three main types of deductions:

• Income Tax: The tax on earnings, calculated according to progressive bands
• National Insurance Contributions (NICs): Contributions that fund Social Security, the NHS, and the State Pension
• Student Loan Repayments: Repayment of student loans, if applicable

Additionally, your employer may deduct other items such as workplace pension contributions or salary sacrifice schemes. Understanding each component is key to knowing how much will actually land in your account.

If you work in the UK or plan to move there, this guide explains everything you need to know. For a quick calculation, use our UK PAYE calculator.

The Personal Allowance is the amount of income you can earn tax-free each year. For the 2025/26 tax year (6 April 2025 to 5 April 2026), the Personal Allowance is 12,570 pounds. This means you pay no income tax on your first 12,570 pounds of annual income.

Tax bands for England, Wales and Northern Ireland 2025/26:

Band	Taxable income	Rate
Personal Allowance	Up to 12,570 pounds	0%
Basic Rate	12,571 - 50,270 pounds	20%
Higher Rate	50,271 - 125,140 pounds	40%
Additional Rate	Over 125,140 pounds	45%

Scotland has different bands:

Band	Taxable income	Rate
Personal Allowance	Up to 12,570 pounds	0%
Starter Rate	12,571 - 14,876 pounds	19%
Basic Rate	14,877 - 26,561 pounds	20%
Intermediate Rate	26,562 - 43,662 pounds	21%
Higher Rate	43,663 - 75,000 pounds	42%
Advanced Rate	75,001 - 125,140 pounds	45%
Top Rate	Over 125,140 pounds	48%

Personal Allowance reduction: If your income exceeds 100,000 pounds, your Personal Allowance is reduced by 1 pound for every 2 pounds above that threshold. This means that if you earn 125,140 pounds or more, your Personal Allowance is zero. This phenomenon creates an effective marginal rate of 60% between 100,000 and 125,140 pounds, as you lose the allowance in addition to paying 40%.

Practical example: If you earn 35,000 pounds annually:

• First 12,570 pounds: 0% = 0 pounds
• Next 22,430 pounds (12,571 to 35,000): 20% = 4,486 pounds
• Total Income Tax: 4,486 pounds per year (373.83 pounds per month)

National Insurance Contributions (NICs) are mandatory contributions that fund the State Pension, the NHS (National Health Service), and other social benefits. Unlike Income Tax, NICs have their own thresholds and rates.

Employee NIC classes (Class 1) 2025/26:

Weekly earnings range	Annual equivalent	Employee rate
Up to 242 pounds	Up to 12,570 pounds	0%
242 - 967 pounds	12,570 - 50,270 pounds	8%
Over 967 pounds	Over 50,270 pounds	2%

Employer contributions:

• The employer pays 13.8% on employee earnings above 175 pounds per week (9,100 pounds annually)
• Additionally, the employer pays a 0.5% Apprenticeship Levy if annual payroll exceeds 3 million pounds

Key National Insurance thresholds 2025/26:

• Primary Threshold (PT): 242 pounds weekly / 12,570 pounds annually. Below this threshold you pay no employee NICs
• Lower Earnings Limit (LEL): 125 pounds weekly / 6,500 pounds annually. If you earn at least this amount, you are credited with contribution weeks for State Pension purposes, even though you pay no NICs
• Upper Earnings Limit (UEL): 967 pounds weekly / 50,270 pounds annually. Above this limit, the rate drops from 8% to 2%

Why NICs matter:

Your National Insurance contributions determine your entitlement to the State Pension. You need at least 10 qualifying years to receive any State Pension, and 35 years to receive the full amount (221.20 pounds per week in 2025/26). You can check your record on the HMRC website.

Example: If you earn 35,000 pounds annually:

• First 12,570 pounds: 0%
• Next 22,430 pounds (12,571 to 35,000): 8% = 1,794.40 pounds
• Total NICs: 1,794.40 pounds per year (149.53 pounds per month)

Your tax code is a combination of numbers and letters that tells your employer how much Personal Allowance you have and how to calculate your tax. It appears on your payslip and in your P2 letter from HMRC. Understanding it is essential to verify that you are not being overcharged.

How to read a tax code:

The most common tax code is 1257L. Here is how to read it:

• 1257: Indicates your Personal Allowance divided by 10. In this case, 1257 x 10 = 12,570 pounds of tax-free income
• L: Indicates you are entitled to the standard Personal Allowance

Common tax code letters:

Letter	Meaning
L	Standard Personal Allowance
M	You have received 10% of your partner's Personal Allowance (Marriage Allowance)
N	You have transferred 10% of your Personal Allowance to your partner
T	Your allowance includes other calculations
0T	Personal Allowance used up or HMRC does not have enough information
BR	All income from this source taxed at 20% (basic rate)
D0	All income from this source taxed at 40% (higher rate)
D1	All income from this source taxed at 45% (additional rate)
NT	No tax withheld on this income
S	Scottish resident (Scottish rates)
C	Welsh resident (Welsh rates)
K	You have untaxed income that reduces your allowance (e.g., benefits in kind)

Emergency codes:

If you see W1, M1, or X at the end of your tax code, it means you are on an emergency code. This often happens when you start a new job and your employer has not received your P45 from your previous employment. On an emergency code, tax is calculated month by month without accumulation, which can result in overpayment. This normally corrects itself when HMRC updates your information.

What to do if your tax code is wrong:

If you believe your tax code is incorrect, contact HMRC directly. An incorrect tax code can cause you to overpay by hundreds or even thousands of pounds per year.

If you have a student loan in the UK, repayments are automatically deducted from your paycheck through the PAYE system once you earn above a certain threshold. There are several repayment plans with different thresholds:

Student loan repayment plans 2025/26:

Plan	Applies to	Annual threshold	Rate
Plan 1	Loans before Sept 2012 (England/Wales) or Scotland/NI	24,990 pounds	9%
Plan 2	Loans from Sept 2012 (England/Wales)	27,295 pounds	9%
Plan 4	Scottish loans from Sept 2023	31,395 pounds	9%
Plan 5	Loans from Sept 2023 (England)	25,000 pounds	9%
Postgraduate Loan	Postgraduate loans	21,000 pounds	6%

How the repayment is calculated:

You only pay 9% (or 6% for postgraduate) on the amount that exceeds the threshold, not on your entire salary. If you have both an undergraduate and postgraduate loan, both repayments apply simultaneously.

Example with Plan 2:

• Annual salary: 35,000 pounds
• Plan 2 threshold: 27,295 pounds
• Amount above threshold: 35,000 - 27,295 = 7,705 pounds
• Annual repayment: 7,705 x 9% = 693.45 pounds
• Monthly repayment: 57.79 pounds

Important points:

• Student loans are automatically written off after 25-40 years depending on the plan (30 years for Plan 2, 40 years for Plan 5)
• If your earnings fall below the threshold, repayments pause automatically
• Interest continues to accrue even when you are not making repayments
• If you move outside the UK, you must notify the Student Loans Company (SLC) and make direct payments based on your overseas income

Since 2012, the law requires all UK employers to automatically enroll their workers in a workplace pension scheme (Auto-Enrolment). This is another deduction you will see on your payslip, but unlike taxes, it is money going toward your future.

Minimum contributions 2025/26:

Contributor	Minimum percentage
Employee	5% (includes tax relief)
Employer	3%
Total minimum	8%

Contributions are calculated on qualifying earnings, which is the portion of your salary between 6,240 and 50,270 pounds annually. Many employers use the full salary band instead, which can be more generous.

Tax advantages of pensions:

• Employee contributions are deducted before tax (in most schemes), reducing your taxable income
• If your employer uses a salary sacrifice scheme, you also save on National Insurance
• Higher Rate (40%) and Additional Rate (45%) taxpayers can claim additional relief through their tax return
• Money within the pension grows tax-free

Example of tax savings with salary sacrifice:

• Gross salary: 35,000 pounds
• 5% contribution via salary sacrifice: 1,750 pounds
• Taxable salary: 33,250 pounds
• Income Tax saving: 350 pounds (20%)
• NICs saving: 140 pounds (8%)
• Total tax saving: 490 pounds per year

You can opt out, but you would be giving up free money from your employer and the tax advantage. Most advisors recommend contributing at least enough to receive the maximum employer contribution.

Let us walk through the complete breakdown for a typical salary of 35,000 pounds annually in England, with a standard 1257L tax code:

Case details:

• Annual gross salary: 35,000 pounds
• Tax code: 1257L
• Resident in England
• Student Loan Plan 2
• Pension: 5% salary sacrifice
• No second employment

Step 1: Pension (salary sacrifice)

• 5% of 35,000 = 1,750 pounds
• Taxable salary: 33,250 pounds

Step 2: Income Tax

• First 12,570 pounds: 0% = 0
• Next 20,680 pounds (12,571 to 33,250): 20% = 4,136 pounds
• Total Income Tax: 4,136 pounds (344.67 pounds/month)

Step 3: National Insurance

• First 12,570 pounds: 0%
• Next 20,680 pounds (12,571 to 33,250): 8% = 1,654.40 pounds
• Total NICs: 1,654.40 pounds (137.87 pounds/month)

Step 4: Student Loan Plan 2

• Salary above threshold (27,295): 33,250 - 27,295 = 5,955 pounds
• 9% of 5,955 = 535.95 pounds
• Total student loan: 535.95 pounds (44.66 pounds/month)

Final annual result:

Item	Annual	Monthly
Gross salary	35,000.00	2,916.67
Pension (salary sacrifice)	-1,750.00	-145.83
Income Tax	-4,136.00	-344.67
National Insurance	-1,654.40	-137.87
Student Loan	-535.95	-44.66
Net salary	26,923.65	2,243.64

Without the student loan and pension, the monthly net would be approximately 2,434 pounds. Use our UK PAYE calculator to see your exact breakdown with your personal details.

There are several entirely legal strategies to reduce your tax burden in the UK:

1. Maximize your pension contribution

Pension contributions are one of the most effective ways to reduce taxes. If your employer offers salary sacrifice, every pound you contribute saves both Income Tax and NICs. The annual allowance for pension contributions with tax relief is 60,000 pounds (or 100% of your earnings, whichever is lower).

2. Marriage Allowance

If you are married or in a civil partnership and one of you earns less than 12,570 pounds, the lower-earning spouse can transfer 1,260 pounds of their Personal Allowance to the other. This saves up to 252 pounds per year.

3. ISA (Individual Savings Account)

While ISAs do not directly reduce your income tax, all returns (interest, dividends, capital gains) within an ISA are completely tax-free. The annual limit is 20,000 pounds. Types of ISA:

• Cash ISA: Similar to a savings account
• Stocks and Shares ISA: For investments in funds and shares
• Lifetime ISA: For buying your first home or retirement (25% government bonus up to 1,000 pounds/year)

4. Tax-free employer benefits

• Cycle to Work scheme: Buy a bicycle through your employer without paying tax
• Childcare vouchers / Tax-Free Childcare: Help with nursery costs
• Electric vehicle salary sacrifice: Very tax-efficient benefit for electric cars

5. Claim deductible expenses

If you work from home, use your vehicle for work, or buy tools necessary for your job, you can claim some of these costs from HMRC. You can do this through your HMRC online account or by calling directly.

6. Check your tax code

Thousands of people in the UK overpay simply because they have an incorrect tax code. Check yours on every payslip and contact HMRC if something does not add up. You can claim back up to 4 years of overpaid tax.

Complement your tax calculation with our percentage calculator to analyze what proportion of your income goes to each item.