PAYE, short for Pay As You Earn, is how your employer takes income tax and National Insurance out of your wages before you’re paid and sends those amounts straight to HM Revenue and Customs. Instead of saving up for a bill at the end of the year, you settle as you go across the tax year, which runs from 6 April to 5 April. The same system handles student loan repayments, workplace pension contributions, and adjustments for things like company cars, so most of what changes your take-home pay flows through it.
Your Tax Code Drives Everything
Every PAYE calculation starts with your tax code. It’s a short string of numbers and a letter that tells your employer’s payroll software how much of your pay is tax-free each period. The most common code for 2026–27 is 1257L: the digits are your Personal Allowance of £12,570 divided by ten, and the L confirms you get the standard allowance.1GOV.UK. Income Tax Rates and Personal Allowances – Current Rates and Allowances
Other letters signal different situations. BR taxes everything from that job at the basic rate, which often applies to a second job where your allowance is already used up at the first. D0 taxes everything at the higher rate. A K code means taxable benefits or debts from earlier years are larger than your allowance, so extra tax is collected through your wages. NT means no tax is deducted and only applies in narrow cases.2GOV.UK. Understanding Your Employees Tax Codes – What the Letters Mean
Earn above £100,000 and the allowance shrinks by £1 for every £2 over that line, hitting zero at £125,140.1GOV.UK. Income Tax Rates and Personal Allowances – Current Rates and Allowances HMRC updates your code to reflect this automatically, but a bonus or pay rise that crosses the threshold can catch people out.
PAYE normally works on a cumulative basis. Payroll tracks your total pay and total allowance from 6 April onward, so a big month followed by a small one evens out. Sometimes HMRC puts you on a non-cumulative basis, called Week 1 or Month 1, which treats each period on its own. That’s usually temporary while a code gets sorted.
What Comes Out of Your Pay
Income Tax
After your Personal Allowance is set aside, the rest of your income is taxed in bands. The system is progressive: a higher rate only applies to the slice of income within that band, not to everything you earn. For 2026–27 in England, Wales, and Northern Ireland:
- Basic rate of 20% on taxable income up to £37,700
- Higher rate of 40% on taxable income from £37,701 to £125,140
- Additional rate of 45% on taxable income above £125,140
These thresholds have been frozen since 2021 and stay frozen through at least 2027–28.3HM Revenue & Customs. Income Tax Rates and Allowances for Current and Previous Tax Years As wages rise, more people move into higher bands without any change in the law.
National Insurance
National Insurance is the second big deduction. It funds the State Pension, statutory benefits, and the NHS. As an employee you pay Class 1 contributions of 8% on earnings between £242 and £967 a week (£12,570 to £50,270 a year), and 2% on anything above the upper limit.4GOV.UK. Rates and Thresholds for Employers 2026 to 2027 If you earn less than £129 a week you pay no NI, though you also don’t build a qualifying year for the State Pension unless you reach that floor. NI stops at State Pension age; income tax does not.
Student Loan Repayments
If you have a student loan, your employer deducts repayments once your pay crosses the threshold for your plan. The plan depends on when and where you studied:
- Plan 1 (courses started before September 2012): 9% of income above £26,065 a year
- Plan 2 (courses started between September 2012 and July 2023): 9% above £28,470
- Plan 5 (courses from August 2023): 9% above £25,000
- Postgraduate Loan: 6% above £21,000
Both an undergraduate and a postgraduate loan can run at the same time.5GOV.UK. Student Loans – A Guide to Terms and Conditions 2026 to 2027 Repayments show as their own line on your payslip, and no deduction is taken in a period where your earnings dip below the threshold.
Workplace Pension
Auto-enrolment requires your employer to put you into a workplace pension if you’re aged 22 to State Pension age and earn at least £10,000 a year. The minimum total contribution is 8% of qualifying earnings, meaning the slice of pay between £6,240 and £50,270, with at least 3% from your employer and 5% from you.6The Pensions Regulator. Minimum Contribution Increases Planned by Law – Phasing7GOV.UK. Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2026-27
Tax relief works in one of two ways depending on your scheme. Under net pay, your contribution comes out before income tax is calculated, so full relief is automatic. Under relief at source, your contribution comes from after-tax pay and the pension provider claims 20% back from HMRC. Higher-rate taxpayers in relief-at-source schemes have to claim the extra relief themselves through Self Assessment or by contacting HMRC. You can opt out of auto-enrolment, but you lose the employer contribution if you do.
If You Live in Scotland
The rates above only apply in England, Wales, and Northern Ireland. The Scottish Parliament sets its own income tax rates and bands, and Scottish taxpayers get a tax code starting with S, such as S1257L. Scotland has more bands, including a 19% starter rate on the first slice of taxable income and rates up to 48% on earnings above £125,140.8mygov.scot. Current Rates Where you live on 6 April sets which rates apply for the whole year, no matter where your employer is based. National Insurance rates are the same across the UK.
Starting, Changing, and Leaving Jobs
When you start a new job with a P45 from your previous employer, your new employer carries over your tax code and cumulative pay figures so nothing resets. Without a P45, you complete a Starter Checklist so payroll can work out the right code from your first payslip. The form asks about previous jobs and student loans to avoid an emergency code that would over- or under-deduct.9GOV.UK. Starter Checklist if Youre Starting a New Job
Your P45 is issued when you leave a job. It shows your pay and tax up to your leaving date. Your employer sends one part to HMRC and gives you three: one to keep and two to hand to your next employer. Handing them over promptly is what stops you being placed on an emergency code.
Your P60 is an end-of-year summary. Anyone on the payroll on 5 April gets one by 31 May, showing total pay and total tax and NI for the year.10GOV.UK. Give Employees a P60 Lenders and benefits offices often ask for it, so keep it somewhere safe.
A P11D covers taxable benefits your employer provides outside payroll, such as a company car, private medical insurance, or an interest-free loan above a threshold. Your employer reports the benefit to HMRC, and your tax code is usually adjusted to collect the extra tax across the following year.
When PAYE Doesn’t Land Right
PAYE aims to collect the right amount by year-end, but it doesn’t always. Job changes, multiple employments, fluctuating income, or a slow tax code update can leave you over- or under-taxed. After the tax year ends, HMRC reconciles the figures and may send a P800 tax calculation letter if there’s a difference.11GOV.UK. Tax Overpayments and Underpayments – If Your Tax Calculation Letter P800 Says Youre Due a Refund
Overpaid? The letter tells you how much and how to claim it. You can usually request the refund online and get it by bank transfer within a few weeks. Miss the online window and HMRC sends a cheque.
Underpaid? HMRC normally recovers the shortfall by adjusting your tax code for the following year, spreading the extra tax across twelve months of pay so you don’t face a single bill.12GOV.UK. Tax Overpayments and Underpayments – If Your Tax Calculation Letter P800 Says You Owe Tax For larger debts, HMRC may contact you to arrange direct payment instead.
Adjustments You Can Ask For
Two changes worth knowing about run through PAYE by adjusting your tax code. Marriage Allowance lets you transfer £1,260 of your Personal Allowance to a spouse or civil partner, cutting their tax by up to £252 a year. You qualify if one of you earns below the Personal Allowance and the other is a basic-rate taxpayer.13GOV.UK. Marriage Allowance – How It Works Once approved, both partners’ codes update automatically.
If you spend your own money on things your job requires and your employer doesn’t reimburse you, you can claim tax relief through PAYE as well. Common examples include professional subscriptions, business mileage in your own vehicle, and cleaning a required uniform. For claims of £2,500 or less, form P87 goes to HMRC and, if accepted, your tax code is adjusted so you pay less tax going forward. Larger claims go through Self Assessment.