How PAYE Tax Works in the UK

What is PAYE?

PAYE (Pay As You Earn) is how most UK employees pay income tax and National Insurance. Your employer deducts tax from your wages before you are paid and sends it to HMRC — you receive net (take-home) pay in your bank account.

This system spreads tax across the year rather than one large bill. HMRC tells your employer how much to deduct using your tax code.

Income tax bands for 2025/26

Most people have a personal allowance of £12,570 — no income tax on earnings up to that amount (unless your tax code reduces the allowance). Above that, tax is charged in bands:

• Basic rate (20%): roughly £12,571 to £50,270
• Higher rate (40%): roughly £50,271 to £125,140
• Additional rate (45%): above £125,140

Understanding your tax code

Your tax code tells your employer how much tax-free pay to give you each month. 1257L is common — it reflects the standard £12,570 allowance split across the year.

Other codes (BR, D0, K codes, emergency codes) mean different deductions. A K code means you owe tax from other income or benefits. Check your tax code on GOV.UK if take-home pay suddenly changes.

National Insurance (NI)

NI is separate from income tax. For employees in 2025/26, NI is typically 8% on earnings between the primary threshold (£12,570) and upper earnings limit (£50,270), and 2% above that.

NI funds state benefits including the State Pension. Self-employed people pay different NI classes.

Student loan repayments through PAYE

If you have a UK student loan, repayments are usually deducted automatically once income exceeds your plan threshold. Plan 2 is 9% of earnings above £27,295 per year; Plan 5 uses a lower threshold.

Postgraduate loans add another 6% above their threshold. Combined plans can take a noticeable slice of gross pay.

Workplace pensions

Auto-enrolment means eligible employees join a workplace pension. Contributions may reduce taxable pay depending on scheme type (net pay vs relief at source vs salary sacrifice).

A 5% pension contribution on £35,000 lowers take-home pay but builds long-term savings — factor it in when budgeting.

Why PAYE amounts change mid-year

Bonuses, pay rises, starting a second job, benefits in kind or HMRC adjustments can change deductions. Underpaid tax from a previous year may be collected via a lower tax code.

Always open P60 (end of tax year) and P45 (when leaving a job) — they summarise tax paid.

PAYE vs self-assessment

PAYE covers employment income for most people. You may still need to file a self-assessment if you have self-employment, rental income, high dividends or other untaxed income.

Estimate your take-home pay

Use our PAYE Salary Calculator UK with your annual salary, pension % and student loan plan for a rough monthly and annual net pay estimate. General guidance only — check payslips and GOV.UK for official figures.