Here’s something that frustrates every new starter: you accept a £30,000 salary and then your first payslip lands and it’s... noticeably less than £2,500. Where did the rest go? Between your employer paying you and the money hitting your bank account, quite a few deductions get taken. Understanding what they are isn’t just interesting — it’s how you spot payslip errors, budget properly, and negotiate salary knowing what you’ll actually keep.
How PAYE Works
PAYE stands for Pay As You Earn, and it’s the system HMRC uses to collect income tax straight from your wages before you get them. Your employer works out the tax each pay period using your tax code, which tells them how much tax-free income to give you.
For 2025/26, the standard Personal Allowance is £12,570. That means the first £12,570 you earn in a tax year is completely tax-free. After that, you pay 20% on income up to £50,270 (basic rate), 40% between £50,271 and £125,140 (higher rate), and 45% on anything above £125,140 (additional rate). So on a £35,000 salary, you’re only paying income tax on £22,430 of it.
Tax Codes — What Do Those Letters Mean?
Your tax code is on your payslip and P60. Most people are on 1257L, which means you get the standard £12,570 Personal Allowance. The number is your allowance divided by 10, and the letter tells HMRC about your situation:
- L — Standard Personal Allowance (the most common)
- M — You’ve received 10% of your partner’s allowance through Marriage Allowance
- BR — All income taxed at basic rate (usually second jobs)
- 0T — No Personal Allowance (HMRC doesn’t have enough info about you)
- K — You owe tax from a previous year, and they’re clawing it back through your code
A quick heads-up: if your tax code looks wrong, call HMRC straightaway. An incorrect code can mean you’re overpaying or underpaying tax all year, and sorting it out in January is much more painful than catching it early.
National Insurance Contributions
National Insurance is separate from income tax, even though they both come out of your pay. For employees in 2025/26, you pay Class 1 NI at 8% on earnings between £12,570 and £50,270, and 2% on everything above that. There’s no upper limit — the 2% just keeps going.
Your employer also pays NI on your behalf — 13.8% on earnings above £9,100 (the Secondary Threshold). This doesn’t come out of your pocket, but it’s worth knowing because it affects how much you actually cost your employer. If you’re negotiating a pay rise, your boss is paying more than just the headline increase.
Student Loan Repayments
Got a student loan? Repayments get taken through PAYE once you earn above a certain threshold. The rates depend on which plan you’re on:
- Plan 1 (England/Wales pre-2012, all NI/Scotland): 9% of earnings above £24,990/year
- Plan 2 (England/Wales post-2012): 9% above £27,295/year
- Plan 4 (Scotland post-1998): 9% above £31,395/year
- Plan 5 (England post-2023): 9% above £25,000/year
- Postgraduate Loan: 6% above £21,000/year
And yes, if you’ve got a Plan 2 and a Postgraduate Loan, they’re both deducted separately. Your payslip can look pretty depressing in that situation.
Pension Auto-Enrolment
Since 2019, every eligible employee gets automatically enrolled into a workplace pension. The minimum contribution is 8% of qualifying earnings (between £6,240 and £50,270), split 5% from you and 3% from your employer. Plenty of employers offer more generous schemes, though — always check.
Here’s the good bit: pension contributions are usually taken before tax (called “salary sacrifice” or “net pay”). So a £100 pension contribution from a basic-rate taxpayer only actually “costs” you £80 in take-home pay, because you save £20 in tax. Turning down your employer’s pension contribution is literally turning down free money.
Scottish Income Tax
Live in Scotland? Your income tax rates are different from the rest of the UK. Scotland has six bands: Starter (19%), Basic (20%), Intermediate (21%), Higher (42%), Advanced (45%), and Top (48%). Your tax code will start with “S” (like S1257L). The thresholds differ from England too, so the same gross salary produces a different net pay depending on which side of the border you live on. Something to bear in mind if you’re considering a move.
The 60% Tax Trap
This one catches a lot of people out. If you earn over £100,000, your Personal Allowance gets reduced by £1 for every £2 above £100,000. By the time you hit £125,140, it’s completely gone. The maths works out to an effective 60% tax rate on income between £100,000 and £125,140. Sixty percent. That’s not a typo.
Take Rachel, a marketing director in Birmingham who just got promoted from £95,000 to £110,000. She’s now losing £1 of Personal Allowance for every £2 she earns above £100,000, on top of 40% income tax. Pension contributions are the most common way to bring your adjusted income back below £100,000 and dodge this trap entirely.
See Your Actual Take-Home Pay
Plug your numbers into our free take-home pay calculator and see exactly what you’ll keep each month — PAYE, NI, student loans, pension, Scottish tax, the lot. Takes about 30 seconds.