What Is PAYE? The Complete 2025/26 Guide
PAYE (Pay As You Earn)is the system HMRC uses to collect income tax and National Insurance directly from your wages before your employer pays you. If you’re employed in the UK, PAYE is the reason your payslip shows deductions — and understanding it means you can check you’re paying the right amount.
How PAYE Works
Each pay period your employer calculates how much tax and National Insurance to withhold based on your tax code and the current tax bands. The money is sent to HMRC on your behalf, so most employees never need to file a Self Assessment return.
2025/26 Income Tax Bands (England, Wales & Northern Ireland)
| Band | Taxable Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Note:For every £2 you earn above £100,000, your Personal Allowance is reduced by £1. This means it reaches zero at £125,140, creating an effective 60% tax rate in that band.
2025/26 Employee National Insurance Rates
| Earnings | NI Rate |
|---|---|
| Up to £12,570 (Primary Threshold) | 0% |
| £12,570 – £50,270 (Upper Earnings Limit) | 8% |
| Above £50,270 | 2% |
Worked Example: £35,000 Salary
Worked Example: Monthly Take-Home on £35,000
| Gross annual salary | £35,000.00 |
| Personal Allowance | £12,570.00 |
| Taxable income | £22,430.00 |
| Income tax (20% of £22,430) | −£4,486.00 |
| Employee NI (8% of £22,430) | −£1,794.40 |
| Total annual deductions | −£6,280.40 |
| Annual take-home | £28,719.60 |
| Monthly take-home | £2,393.30 |
Assumes tax code 1257L, no student loan, no pension contributions.
Understanding Your Tax Code
Your tax code tells your employer how much tax-free income you get. The most common code is 1257L, which gives you the standard Personal Allowance of £12,570.
| Code | Meaning |
|---|---|
| 1257L | Standard code — £12,570 tax-free allowance |
| BR | All income taxed at basic rate (20%) — common for second jobs |
| D0 | All income taxed at higher rate (40%) |
| NT | No tax deducted |
| K codes | You owe more tax than your allowance covers (e.g., company car benefit) |
| 0T | No allowance — often used as emergency code |
What PAYE Doesn’t Cover
- Self-employment income (reported via Self Assessment)
- Rental income above £1,000
- Capital gains above the £3,000 annual exempt amount
- Foreign income not already taxed at source
- Dividends above the £500 allowance
Check Your Take-Home Pay
Use our free PAYE calculator to see your exact take-home pay for 2025/26, including student loan repayments and pension contributions.
Open PAYE Calculator →