PAYE Explained UK — Tax Codes, Payslips & What Your Employer Deducts
Most employees never file a tax return, yet tax comes out of every pay packet. That is PAYE at work. In this PAYE explained UK guide, you will see what PAYE is, how your tax code works, what each line on your payslip means, and what to do if something looks wrong.
What is PAYE?
This is PAYE explained UK in a nutshell: PAYE stands for Pay As You Earn, and your employer works out the Income Tax and National Insurance you owe each payday, deducts it before you are paid, and sends it to HMRC. Your employer reports your pay to HMRC every payday through Real Time Information (RTI), and student loan repayments and pension contributions are often taken through payroll too.
How PAYE works: cumulative tax, non-cumulative National Insurance
Income Tax under PAYE is cumulative. Your employer looks at your total pay so far in the tax year, works out the tax due, and subtracts what you have already paid. Earn more in one month and you pay more tax; earn less later and the system can correct itself, even refunding tax through your pay.
National Insurance is non-cumulative: it is worked out on each pay period on its own. A one-off bonus can push that month’s pay into National Insurance, and a quiet month does not claw it back.
Your tax code
Your tax code tells your employer how much of your pay is tax-free. It appears on your payslip, usually near the top. The standard code for 2025/26 is 1257L: 1257 means a Personal Allowance of £12,570 (1257 × £10), and L means you get the standard allowance. With code 1257L, the first £12,570 of your pay in the tax year is tax-free. The number can change: if HMRC reduces your Personal Allowance — because of a company car, or tax you owe — the number goes down.
| Code letter | What it means |
|---|---|
| M | Marriage Allowance received from your spouse or civil partner |
| N | Marriage Allowance given to your spouse or civil partner |
| T | Other adjustments, for example a reduced Personal Allowance |
| S | Scottish taxpayer (Scottish rates apply) |
| C | Welsh taxpayer (Welsh rates apply) |
| BR | All income from this job taxed at 20% — common for a second job |
| D0 | All income from this job taxed at 40% |
| K | You owe tax on extra income, so your tax-free amount is negative |
Emergency tax codes
If your employer does not have the right tax code — for example, when you start a new job — you may be put on an emergency tax code, ending in W1 (week 1 basis) or M1 (month 1 basis). Tax is then worked out on that week’s or month’s pay only, not cumulatively, so you often pay too much tax at first. It is corrected once HMRC sends your proper code, usually through your pay. If a W1 or M1 code stays on your payslip for more than a month or two, chase it up.
Income Tax rates 2025/26
For England, Wales and Northern Ireland, the bands for 2025/26 are:
| Total income | Rate |
|---|---|
| £12,570 to £50,270 | 20% basic rate |
| £50,271 to £125,140 | 40% higher rate |
| Above £125,140 | 45% additional rate |
The Personal Allowance shrinks once your total income passes £100,000 — you lose £1 of allowance for every £2 over £100,000 — so it disappears at £125,140. Scotland has different bands and rates, and your code starts with S if you are a Scottish taxpayer.
National Insurance 2025/26
National Insurance is separate from Income Tax. It helps fund the State Pension and other benefits, and you need a record of contributions to qualify for the full State Pension.
Employee Class 1 National Insurance (2025/26):
| Earnings | Rate |
|---|---|
| Below £12,570 a year (£242 a week / £1,048 a month) | 0% |
| £12,570 to £50,270 a year | 8% |
| Above £50,270 a year | 2% |
Employer Class 1 National Insurance: your employer pays 15% on earnings above the Secondary Threshold of £5,000 a year (£96 a week / £417 a month). This is on top of your pay — it does not come out of your wages or appear on your payslip.
Worked example: £35,000 a year on tax code 1257L
Take an employee earning £35,000 a year, paid monthly, on the standard code 1257L, with no deductions except tax and National Insurance.
- Gross pay: £35,000; less Personal Allowance £12,570; taxable pay £22,430
- Income Tax at 20% on £22,430 = £4,486 a year
- National Insurance at 8% on £22,430 = £1,794 a year (rounded)
- Take-home pay: £35,000 − £4,486 − £1,794 = £28,720 a year, about £2,393 a month
| Monthly | Annual | |
|---|---|---|
| Gross pay | £2,916.67 | £35,000 |
| Income Tax | £373.83 | £4,486 |
| Employee National Insurance | approx. £149.50 | £1,794 |
| Take-home pay (before pension or student loan) | approx. £2,393.33 | £28,720 |
The monthly National Insurance figure is approximate: £2,916.67 minus the £1,048 monthly threshold is £1,868.67, and 8% of that is £149.49. Small rounding differences even out over the year. A pension or student loan would reduce take-home pay further.
How to read your payslip
- Gross pay — total pay before deductions; check it against your salary or hours worked.
- Tax code — usually near the top; normally 1257L.
- Income Tax — tax deducted this pay period, often with the total paid so far this year.
- National Insurance — your employee contribution for this pay period.
- Pension — your workplace pension contribution, if you are in a scheme.
- Student loan — your repayment for this pay period, if you have one.
- Net pay — what actually lands in your bank account.
- Year-to-date figures — total pay, tax and National Insurance so far this tax year; these help you spot a mistake early.
If a line does not make sense, ask your payroll team first — they can usually explain it in a minute.
Student loans and pensions on your payslip
Student loan repayments are collected through PAYE once your earnings pass your plan’s repayment threshold — 9% of earnings above it for Plan 2 loans. Each plan (Plan 1, 2, 4 and 5) has its own threshold, so check GOV.UK for yours. Your payslip shows the plan and the amount deducted.
Workplace pension contributions are usually a percentage of your qualifying earnings. Under automatic enrolment, the minimum total is 8% of qualifying earnings, with at least 3% from your employer. Your contribution normally gets tax relief automatically through payroll.
What to do if your tax code is wrong
Signs of a wrong code include a code that is not 1257L when you expected it to be, a W1 or M1 code that never changes, or a sudden jump in your tax deduction with no pay rise.
- Check your Personal Tax Account on GOV.UK — it shows the tax code HMRC holds for you and your tax paid so far.
- Tell HMRC if the information is wrong — for example, if a previous job is still listed, or a company car benefit has ended.
- Tell your employer if they are using an old code; HMRC sends updated codes, but it can take a few weeks.
- Do not panic about overpaid tax. It is usually refunded through your pay once your code is corrected, or by HMRC after the tax year ends. If you paid too little, HMRC will usually collect it by adjusting your tax code in a later year.
The forms PAYE produces
Three forms sum up your PAYE year: the P60 (by 31 May — your total pay and tax for the year just ended; keep it, lenders often ask for it), the P45 (when you leave a job — give it to your new employer), and the P11D (benefits in kind, such as a company car, taxed separately from salary).
What to check now
- Is the tax code on your latest payslip the one you expect, normally 1257L?
- Does your code end in W1 or M1? If so, and you have been in the job over a month, chase it up.
- Does your gross pay match your salary or your hours and hourly rate?
- Do your year-to-date tax and National Insurance look right for what you have earned so far?
- Does HMRC’s record in your Personal Tax Account match your payslips?
- Keep your P60 when it arrives, and your P45 when you leave a job.
Frequently asked questions
What does PAYE stand for?
Pay As You Earn — the system where your employer deducts Income Tax and National Insurance from your pay before you receive it and sends the money to HMRC.
What is the standard tax code for 2025/26?
1257L: 1257 means a Personal Allowance of £12,570 (1257 × £10), and L means you get the standard allowance.
Why is my tax code BR?
BR means all income from that job is taxed at 20%, with no tax-free allowance — common for a second job, because your Personal Allowance is normally used up by your main job.
How much National Insurance do I pay?
In 2025/26, employees pay 8% on earnings between £12,570 and £50,270 a year, and 2% above £50,270. You pay nothing below £12,570.
What should I do if I think I have paid too much tax?
Check your Personal Tax Account on GOV.UK, tell HMRC if anything is wrong, and let your employer know. Overpaid tax is usually refunded through your pay once your code is corrected, or by HMRC after the tax year ends.
Read next: Self Assessment Tax Return UK 2025/26 — Deadline, Who Must File & How to File and Personal Tax Allowance & UK Income Tax Bands 2025/26 Explained.
This article gives general information about UK tax, not personal financial or tax advice. Tax rules can change, and your situation may be different. Check GOV.UK or speak to a qualified accountant before you act.
