PAYE, short for Pay As You Earn, is the system your UK employer uses to take income tax and National Insurance out of your wages before the money reaches your bank account. Understanding how PAYE income tax works comes down to three moving parts: a tax code from HMRC that tells your employer how much of your pay is tax-free, the tax bands that apply to the rest, and a running calculation across the tax year that keeps your deductions in line with what you actually owe. For 2025/26, the tax-free personal allowance is £12,570, and PAYE only starts biting on earnings above that figure.
What Gets Taxed on Your Payslip
Almost anything your employer pays you counts as taxable earnings under PAYE. Salary, hourly wages, overtime, bonuses, commissions, and tips paid through the business all go into the calculation.
Non-cash perks are in scope too. Company cars and private health insurance are taxable benefits, and HMRC assigns each one a cash value (the “benefit in kind” value) that feeds into your tax. Genuine expense reimbursements are different and can be paid tax-free, but only if they really are reimbursements rather than extra pay in disguise.
Your Tax Code Does the Work
Every employee has a tax code, and it’s the instruction your employer follows when working out how much tax to deduct. A code is a number followed by one or more letters. The most common code for 2025/26 is 1257L: the 1257 stands for the £12,570 personal allowance, and the L means you get the standard allowance with no adjustments.
Other letters change the sums. BR taxes every pound at the basic rate and often appears on a second job. 0T applies no personal allowance at all. Scottish taxpayers see codes prefixed with S, such as S1257L, so the employer applies Scottish rates.
When you start a new job, your employer normally reads your tax code off the P45 from your previous job. If you don’t have a P45, you fill in HMRC’s starter checklist and HMRC sends the code to your employer. Without either, you may land on an emergency code and overpay temporarily until HMRC issues the right one.
The Income Tax Rates PAYE Applies
Once your personal allowance is used up, tax is charged in slices. For 2025/26 (6 April 2025 to 5 April 2026) the bands in England, Wales, and Northern Ireland are:
- Basic rate, 20% on taxable income from £12,571 to £50,270
- Higher rate, 40% from £50,271 to £125,140
- Additional rate, 45% above £125,140
The rates are progressive, so only the income inside each band is taxed at that band’s rate. If you earn £60,000, you pay 20% on the first £37,700 of taxable income and 40% only on the slice sitting in the higher-rate band.
Scottish Income Tax Rates
Scotland uses its own set of bands, and there are seven of them rather than three for 2025/26:
- Starter rate, 19% from £12,571 to £15,397
- Basic rate, 20% from £15,398 to £27,491
- Intermediate rate, 21% from £27,492 to £43,662
- Higher rate, 42% from £43,663 to £75,000
- Advanced rate, 45% from £75,001 to £125,140
- Top rate, 48% above £125,140
The personal allowance itself is the same throughout the UK; only the rates and thresholds differ.
The Allowance Taper Above £100,000
Higher earners lose the personal allowance gradually. Once your adjusted net income passes £100,000, the allowance falls by £1 for every £2 above that figure, and it disappears entirely at £125,140. Inside that band the effective marginal rate reaches 60%: 40% income tax plus another 20% from the shrinking allowance.
National Insurance Alongside Income Tax
PAYE collects National Insurance at the same time as income tax, though the thresholds and rates are different. Under the standard Category A letter for 2025/26, employees pay 8% on weekly earnings between £242 and £967 (roughly £12,570 to £50,270 a year), then 2% on anything above £967 a week.
Employers pay too, at 15% on all earnings above the secondary threshold of £96 a week, with no upper cap. The employer rate rose to 15% from April 2025 (previously 13.8%) and the secondary threshold dropped, so employer NIC now starts much earlier on each worker’s pay. Other category letters (B, H, M, and others) give reduced rates for specific groups such as some married women and employees under 21, but Category A covers most workers.
Why Each Month Reflects the Whole Year
PAYE runs on a cumulative basis. Instead of taxing each pay period in isolation, the payroll software tracks your year-to-date earnings and year-to-date tax paid from 6 April onwards. Each payday it compares those running totals against your year-to-date personal allowance and tax bands, works out the correct total tax so far, and deducts whatever is needed to bring the running total into line.
That’s why a one-off bonus doesn’t wreck a single payslip. The tax impact is spread across the rest of the year, and your personal allowance is divided evenly across pay periods, keeping take-home pay reasonably steady. By 5 April, most employees have paid almost exactly the right amount of tax without filing a self-assessment return.
Other Deductions Taken Through PAYE
Income tax and NIC aren’t the only lines on the deductions side of your payslip. Student loan repayments and workplace pension contributions run through the same PAYE process.
Student Loan Repayments
If you have an outstanding student loan, your employer deducts repayments once your earnings cross a threshold that depends on your plan type. For 2025/26 the annual thresholds are:
- Plan 1 (pre-2012 English/Welsh loans, all Northern Irish loans): £26,900
- Plan 2 (post-2012 English/Welsh loans): £29,385
- Plan 4 (Scottish loans): £33,795
- Plan 5 (post-2023 English/Welsh loans): £25,000
- Postgraduate Loan: £21,000
Plans 1, 2, 4, and 5 take 9% of income above the threshold. Postgraduate loans take 6%. HMRC tells your employer which plan applies, and the deduction is automatic.
Workplace Pension Contributions
Under automatic enrolment, employers must enrol eligible workers into a qualifying pension scheme. The minimum total contribution is 8% of qualifying earnings, with the employer paying at least 3% and the employee typically paying the remaining 5%. Tax relief applies to the employee’s share, and the deduction appears on every payslip.
The Documents You’ll See
Three PAYE forms matter, and each does something different.
P45
When you leave a job, your employer issues a P45 showing your total pay and tax deducted from 6 April up to your leaving date. You hand it to your next employer so they can apply the right code from day one.
P60
If you’re still on the payroll on 5 April, your employer must give you a P60 by 31 May, on paper or electronically.1GOV.UK. Your P45, P60 and P11D Form It summarises your earnings and tax for the whole tax year. Keep it — you’ll need it for self-assessment, mortgage applications, and tax credit claims.
P11D
The P11D reports taxable benefits and expenses that weren’t put through the payroll. Employers file one with HMRC by 6 July after the end of the tax year and give the employee a copy.2GOV.UK. Expenses and Benefits for Employers: Reporting and Paying HMRC then adjusts your tax code for the following year to collect any tax owed on those benefits.
From April 2027, most benefits in kind will have to be reported and taxed through payroll in real time, which will remove the P11D for the majority of benefits. HMRC originally planned this for April 2026 and pushed it back a year. Employers can already payroll benefits voluntarily if they want to switch early.3GOV.UK. Technical Note: Mandating the Reporting of Benefits in Kind and Expenses Through Payroll Software – An Update
If Your Tax Code Looks Wrong
A wrong tax code means you’re either overpaying or underpaying tax on every payday, so check yours whenever a new coding notice arrives or your payslip looks off. The quickest route is HMRC’s “Check your Income Tax” online service, where you can review the employment, pension, and benefits details HMRC holds and correct anything wrong or missing.4GOV.UK. If You Think Your Tax Code Is Wrong
Once HMRC agrees the code needs changing, they update it and notify you and your employer within 15 working days. If you’ve just started a new job, wait at least 35 days before contacting HMRC, because they need time to receive your new income details. If you overpaid because of a wrong code, HMRC will usually refund the difference through an adjusted code for the rest of the year, and your next few payslips will show higher take-home pay until the overpayment is cleared.