Most of us think about our take-home pay and not how your salary is really taxed in the UK.
In the UK, your employer deducts Income Tax and National Insurance Contributions (NICs) before you even see your salary. Understanding the basics can help you plan, spot errors and make the most of any reliefs you’re entitled to.
Key Practical Considerations
PAYE (Pay As You Earn)
- Your employer operates PAYE under Income Tax (Earnings and Pensions) Act 2003 and deducts tax from each pay packet.
- You don’t usually file a tax return unless you have extra income (e.g. rental profits).
Income Tax
- Personal Allowance: The first £12,570 of annual income is tax-free (for 2025/26).
- Basic-rate Band: You pay 20% on income from £12,571 up to £50,270.
- Higher-rate Band: You pay 40% on income from £50,271 up to £125,140.
- Additional-rate Band: You pay 45% on income above £125,140.
- These thresholds are set by the UK Government and frozen until April 2028.
National Insurance Contributions (NICs)
- Employee NICs (Class 1):
- 0% on weekly earnings up to £242 (£12,570 pa).
- 8% on earnings between £242 and £967 a week (up to £50,270 pa).
- 2% on earnings above £967 a week.
- Employer NICs (also Class 1):
- 15% on all earnings above £96 a week (£5,000 pa).
- Employers can offset part of this via the £10,500 Employment Allowance (if they qualify).
Payslip Breakdown
A standard payslip will show: Gross pay (your salary before deductions)
A standard UK payslip will show:
- Gross pay (your salary before deductions)
- Income Tax deducted (via PAYE)
- Employee NICs deducted
- Any pension contributions or student-loan repayments
- Net pay (what lands in your bank)
For example, meet Emma, a marketing executive on £40,000 pa:
- Personal Allowance: £12,570 → tax-free.
- Taxable pay: £27,430 → taxed at 20% = £5,486 pa.
- NICs:
- First £12,570 pa at 0% = £0
- Next £27,430 at 8% = £2,194 pa
- Take-home calculation:
- Gross salary: £40,000
- Less Income Tax: £5,486
- Less Employee NICs: £2,194
- Net pay: £32,320 pa (approximately £2,693 per month)
Your salary isn’t just a single figure on your contract. Income Tax and NICs reduce your gross pay before it reaches you, and errors can be costly. Understanding how the system works and keeping your records up to date will help you avoid surprises.
Indemnity
This article is for general information only and does not constitute professional advice. Individual circumstances vary; please seek tailored advice before acting. SAIL International does not warrant any particular outcome and accepts no liability for losses arising from reliance on this content.