How PAYE Works in the UK: Personal Allowance, Bands & Take-Home Pay
Why PAYE matters
PAYE — Pay As You Earn — is the system HMRC uses to collect income tax and National Insurance from employee pay in real time. Your employer withholds the right amount each payday, hands it to HMRC, and pays you the rest. If everything is set up correctly, you owe nothing at year end. If it isn’t — wrong tax code, missed allowance, second job not recorded — you either underpay (and HMRC eventually claws back the shortfall) or overpay (and have to claim a refund). Understanding what your employer is actually doing each month is the difference between treating your payslip as a black box and being able to spot an error before it costs you.
This guide explains the moving parts that produce your net pay in England, Wales and Northern Ireland for the 2026/27 tax year. Scotland has its own income tax bands set by Holyrood — those are noted at the end.
The personal allowance
The personal allowance is the slice of income you can earn each tax year before any income tax is due. For 2026/27 it sits at £12,570 — the same figure that has applied since April 2021. The personal allowance has been frozen at this level through to April 2028 under what’s commonly called fiscal drag: as wages rise, more of every pay packet falls into the taxable bands, which lifts the effective tax rate without any formal rate increase.
Two important wrinkles:
- Tapered withdrawal above £100,000. For each £2 of adjusted net income above £100,000, the personal allowance is reduced by £1. It’s fully withdrawn at £125,140. Between £100,000 and £125,140, every extra pound of pay is therefore taxed at the 40% higher rate and removes 50p of allowance (which would otherwise have been tax-free, saving 40p of tax). The combined marginal rate on income in this band is 60%.
- Marriage Allowance. If you earn under the personal allowance and your spouse or civil partner is a basic-rate taxpayer, you can transfer £1,260 of unused allowance to them, worth up to £252 in tax (£1,260 × 20%). It’s not automatic — one of you has to apply via the HMRC online service.
The income tax bands
Income above the personal allowance is taxed in slices at the rates below. The bands are based on taxable income, which is your gross income less the personal allowance and any other reliefs like pension contributions via salary sacrifice.
| Band (England/Wales/NI) | Taxable income | Rate |
|---|---|---|
| Basic rate | £0 – £37,700 | 20% |
| Higher rate | £37,701 – £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
So a £60,000 salary in 2026/27 sees:
- £12,570 inside the personal allowance → £0 tax.
- £37,700 in the basic-rate band → £7,540 at 20%.
- £9,730 in the higher-rate band → £3,892 at 40%.
- Total income tax: £11,432.
Income tax is only half the deduction story — National Insurance is the other half, and PAYE collects both. The combined PAYE-plus-NI deduction on a £60,000 PAYE salary in 2026/27 is roughly £15,400, leaving net annual pay around £44,600. The PAYE calculator handles both together so you can see the full take-home number.
How tax codes apply the allowance
Your employer doesn’t decide your personal allowance — HMRC does, and it communicates that decision through a tax code. The standard code for 2026/27 is 1257L, where 1257 is the personal allowance (£12,570) divided by 10 and L means you get the full standard allowance. The employer’s payroll software divides that allowance by the number of pay periods in the year (12 if monthly, 52 if weekly) and applies one slice of it to each payslip.
Tax codes change for all sorts of reasons: a second job (BR or D0 codes), taxable benefits like a company car (a number-and-letter code with a deduction baked in), a small earlier underpayment HMRC is recovering (K codes), Scottish residence (S prefix), or a temporary emergency code while HMRC catches up with a new job. We cover each code in detail in the UK tax codes guide.
The single most common cause of overpaid PAYE is the wrong tax code on starting a new job, especially mid-year. Your previous employer issues a P45; the new employer uses it; if the P45 hasn’t reached the new payroll team by your first payday, you get put on an emergency code that doesn’t carry forward your earlier allowance use, and you typically overpay until HMRC issues a corrected code. Always check the code on your first payslip in a new job against your previous P45.
Cumulative vs non-cumulative
PAYE runs on a cumulative basis by default. Each payday the payroll calculation looks at your year-to-date pay, applies the year-to-date personal allowance, works out the year-to-date tax that should have been paid, and subtracts what’s already been deducted. The result is the current month’s tax. The cumulative model self-corrects: if you overpaid one month, you underpay the next, and by year-end the right tax has been deducted assuming the code is right.
Some codes — including the emergency W1/M1 codes — run non-cumulatively, meaning each pay period is treated as if it’s the only pay you’ve had that year. Non-cumulative codes are common when there’s missing information about prior pay (a new job mid-year, for example). They typically over-collect tax until the code is corrected; if you end the year on a non-cumulative code, claim the refund through your Personal Tax Account.
Salary sacrifice and net pay arrangements
Pension contributions can change the PAYE arithmetic substantially. Two common structures:
- Salary sacrifice. You agree to a lower contractual salary in exchange for the employer paying the difference into your pension. The lower salary is what PAYE and NI are calculated on, so you save both income tax and NI on the sacrificed amount. This is the most efficient route for higher-rate taxpayers.
- Net pay arrangement. The employer deducts your pension contribution before calculating PAYE. You get full income tax relief at your marginal rate via the lower taxable pay, but the contribution is still subject to NI.
- Relief at source. The pension provider claims 20% relief on your behalf and adds it to the pot; higher-rate and additional-rate taxpayers claim the extra relief via Self Assessment or by writing to HMRC. PAYE doesn’t change — your taxable pay is the gross figure.
Knowing which mechanism your scheme uses matters because it determines whether your payslip already reflects the relief or you have to claim it separately.
Worked example: monthly payslip for £45,000
Take a single employee on £45,000, tax code 1257L, paid monthly:
- Monthly gross: £3,750.
- Monthly personal allowance: £12,570 / 12 = £1,047.50.
- Monthly basic-rate band: £37,700 / 12 ≈ £3,141.67.
- Taxable pay this month: £3,750 − £1,047.50 = £2,702.50.
- Tax at 20% on the £2,702.50 (entirely within the basic-rate band, since £2,702.50 < £3,141.67): £540.50.
- NI Class 1 at 8% on earnings between £242/wk and £967/wk (rough monthly equivalent £1,048 – £4,189): roughly £216.
- Net pay this month: £3,750 − £540.50 − £216 ≈ £2,994.
The cumulative nature of PAYE means that if pay is even across all twelve months, every payslip looks roughly the same. If pay varies — a one-month bonus, for example — the PAYE calculation re-bases against year-to-date totals and pulls more tax in the bonus month (and slightly less in subsequent months as the running balance settles).
Scottish income tax
If your tax code starts with S, you’re a Scottish taxpayer for the year and the Scottish Parliament’s bands apply instead of the rUK schedule. Scotland uses six bands (starter, basic, intermediate, higher, advanced, top) with somewhat different thresholds and a top rate of 48%. The personal allowance is set UK-wide and is the same £12,570, but everything above it falls under Scottish rates. Wales has the power to set its own bands but as of 2026/27 has not diverged — Welsh taxpayers (C prefix) pay the same rates as English/NI taxpayers.
Frequently asked questions
My tax code changed — should I worry? Not necessarily. Codes change for many normal reasons: claiming a tax-deductible expense, beginning or stopping a taxable benefit, joining a salary sacrifice scheme. HMRC will write to you with the new code and the reason. Compare the new number-and-letter combination with the standard 1257L — if the number is much lower, HMRC believes you have less personal allowance available (often because of untaxed income or recovering an underpayment). Log into your Personal Tax Account to see the underlying calculation.
I have two jobs — am I paying too much tax? Possibly. HMRC allocates your personal allowance to one employer by default (usually the main one). The second employer applies a BR code, which taxes all the income at 20%. That’s fine if your second job pushes you into the higher-rate band — you’d owe that tax anyway. But if both jobs combined keep you under the personal allowance, the BR code over-collects. Ask HMRC to split your allowance between the two employers, or claim the refund at year-end through your Personal Tax Account.
Do I have to do a tax return if I’m fully on PAYE? Usually no. PAYE is designed to collect the right tax with no return needed. But if you have side income above £1,000, untaxed dividends or interest above the savings/dividend allowances, rental income, capital gains, or earn over £150,000, you’ll need to register for Self Assessment and reconcile through the tax return.
What’s the difference between PAYE and self-assessment? PAYE is automatic, real-time withholding on employment income through your employer’s payroll. Self Assessment is the annual reconciliation you file directly with HMRC for income that isn’t (or isn’t fully) handled by PAYE — self-employment, rental income, complex situations. Most full-PAYE employees never file a return.
Where do I see my PAYE history? The Personal Tax Account on GOV.UK shows real-time PAYE figures from your employer(s) and the tax code being applied. It’s the authoritative single-source view; payslips reflect what your employer ran, but the PTA shows what HMRC actually believes.
Authoritative sources: GOV.UK PAYE for employees and GOV.UK tax codes.