Understanding Every Line of Your Payslip
1. Gross Pay
Gross pay is your total earnings before any deductions. It includes your basic salary plus any additional payments: overtime, commission, bonuses, shift allowances, car allowance, and any other taxable benefits. This is the starting point for all tax and NI calculations. Your P60 and P45 will show your gross pay for the tax year.
2. PAYE Income Tax
Pay As You Earn (PAYE) is the system used to collect income tax from wages in real time. Your employer deducts tax and sends it directly to HMRC. The amount deducted depends on your tax code and cumulative earnings in the tax year. For 2025/26:
- Personal Allowance: £12,570 — no tax on these earnings
- Basic rate: 20% on earnings from £12,571 to £50,270
- Higher rate: 40% on earnings from £50,271 to £125,140
- Additional rate: 45% on earnings above £125,140
Tax is calculated on a cumulative basis (unless you have a W1/M1 emergency code). This means HMRC looks at your total earnings and tax paid to date and adjusts each month, which is why your tax deduction can change even if your salary stays the same.
3. National Insurance (NI)
Employee National Insurance Contributions (NICs) are deducted at different rates to income tax:
- 8% on weekly earnings between £242 and £967 (£12,570–£50,270/year)
- 2% on weekly earnings above £967 (above £50,270/year)
- No NI on earnings below the Primary Threshold (£242/week)
Unlike income tax, NI is calculated non-cumulatively — each pay period is assessed independently. This means if your earnings fluctuate (e.g. bonus month), your NI will be higher that month regardless of what you paid before.
Key difference: Income tax is cumulative (looks at your whole year so far). National Insurance is period-by-period (each month or week stands alone). This is why a bonus can push you into a higher NI bracket for just one month.
4. Pension Contributions
Under auto-enrolment (introduced 2012, fully phased in 2019), if you are aged 22 to State Pension age and earn more than £10,000 per year, your employer must automatically enrol you into a workplace pension. The minimum contributions for 2025/26 are:
- Employee minimum: 5% of qualifying earnings
- Employer minimum: 3% of qualifying earnings
- Total minimum: 8%
Qualifying earnings is the band between £6,240 and £50,270 per year. Your contribution is calculated on this band, not your full salary. Many employers use full salary contributions instead. If your employer uses salary sacrifice, your pension contribution comes off before tax and NI, saving you money on both.
5. Student Loan Deductions
Your employer deducts student loan repayments via PAYE once you earn above the threshold for your plan. In 2025/26:
| Plan | Who | Threshold (annual) | Rate |
|---|
| Plan 1 | Started before Sept 2012 (England/Wales); all Scottish pre-2021 | £24,990 | 9% |
| Plan 2 | Started after Sept 2012 (England/Wales) | £27,295 | 9% |
| Plan 4 | Scottish students (from 2021) | £31,395 | 9% |
| Plan 5 | Starting from Aug 2023 | £25,000 | 9% |
| Postgrad | Master's/Doctoral loans | £21,000 | 6% |
You repay 9% of the amount above the threshold — not of your full salary. Repayments stop automatically when the loan is paid off (or written off after 25–40 years depending on your plan).
📜 Tax Code Decoder
Your tax code tells your employer how much tax to deduct. Here are the most common codes:
1257L
Standard code — £12,570 personal allowance. Applies to most employees in 2025/26.
BR
Basic Rate — all income taxed at 20%. Used for second jobs or when employer has no P45/P46 info.
D0
Higher Rate — all income taxed at 40%. Usually for second jobs where first job uses basic rate band fully.
D1
Additional Rate — all income taxed at 45%. For high earners with multiple sources of income.
NT
No Tax — no tax deducted at all. Used in specific circumstances such as non-UK tax residents.
0T
No personal allowance — all income taxed from the first pound. Temporary emergency code.
W1/M1
Emergency code — non-cumulative. Tax calculated on this period's pay alone, not total year.
K prefix
You owe tax (e.g. from underpaid in previous year or taxable benefits). Extra tax collected from salary.
Tax code letters: L = standard allowance, M = Marriage Allowance received, N = Marriage Allowance given, T = other adjustments apply, S = Scottish taxpayer, C = Welsh taxpayer.
6. Benefits in Kind (BIK)
If your employer provides non-cash benefits — company car, private medical insurance, gym membership, or interest-free loans over £10,000 — these are classified as Benefits in Kind and are taxable. They appear on your P11D at year end and HMRC adjusts your tax code to collect the tax. The "value" is added to your taxable income. For example, a company car benefit of £5,000 would increase your taxable income by £5,000, costing you £1,000 in extra tax if you are a basic-rate taxpayer.
7. P60 and P45 Documents
Your P60 is an end-of-year summary of all your pay and deductions for the tax year (6 April to 5 April). Employers must provide it by 31 May. You need it to complete a self-assessment return, apply for tax credits, or reclaim overpaid tax. Your P45 is issued when you leave employment and shows pay and tax deducted for the portion of the tax year you worked there. Give it to your new employer so they can apply the correct tax code.
8. Payslip Legal Requirements
Under the Employment Rights Act 1996 (as amended in 2019), all workers — including zero-hours and casual workers — have the right to receive a payslip on or before the date they are paid. The payslip must show:
- Gross earnings
- Net earnings (take-home pay)
- Any fixed deductions (with an explanation)
- Any variable deductions (amount for each payment period)
- For workers paid by the hour: the total number of hours worked
Frequently Asked Questions
What is the difference between gross pay and net pay?
Gross pay is your total earnings before any deductions — your headline salary plus any overtime, commission, or bonuses. Net pay (also called take-home pay) is what lands in your bank account after income tax, National Insurance, pension contributions, student loan repayments, and any other authorised deductions have been removed. The difference between the two is often called your "deductions" or "tax wedge".
What does tax code 1257L mean?
Tax code 1257L is the standard code for most UK employees in 2025/26. The number 1257 multiplied by 10 gives your tax-free personal allowance: £12,570. The letter L confirms you are receiving the standard personal allowance with no adjustments. If your code differs from 1257L, HMRC has made an adjustment — perhaps to collect tax on a benefit in kind, recover an underpayment from a previous year, or reflect a different level of allowance.
How is PAYE income tax calculated on my monthly payslip?
For a monthly payslip, HMRC divides your annual personal allowance by 12 (£12,570 ÷ 12 = £1,047.50) and your annual basic-rate band by 12. In month 1 (April), you get 1/12th of your annual allowances. By month 6 (September), you have accumulated 6/12ths. This cumulative approach means if you get a pay rise mid-year, HMRC recalculates your total expected tax and adjusts your deductions going forward. Emergency codes (W1/M1) ignore cumulation and tax each period in isolation.
How much National Insurance do I pay as an employee?
In 2025/26 you pay: 8% on weekly earnings between £242 and £967 (or monthly equivalent: £1,048 to £4,189). 2% on weekly earnings above £967. Nothing on earnings below £242 per week. NI is not cumulative — each pay period is assessed independently. Your payslip will show the amount deducted that period. Note: employer NI (13.8%) is paid on top of this by your employer and does not affect your take-home pay.
What is an emergency tax code and how do I fix it?
An emergency tax code (typically 1257L W1 or 1257L M1) is applied when your employer does not have your P45 from a previous job, or when HMRC does not have complete details. W1 (Week 1) and M1 (Month 1) mean your tax is calculated on each period's pay without reference to what you earned before — non-cumulatively. This can lead to overtaxation. To fix it: submit your P45 to your new employer, or contact HMRC on 0300 200 3300. Once corrected, HMRC will issue a new code and any overpaid tax will be refunded through payroll or a P800 refund notice.
When do student loan repayments start on my payslip?
Deductions start once your gross earnings for the pay period exceed the monthly equivalent of your plan's threshold. For Plan 2 in 2025/26 (threshold £27,295/year), repayments start when your monthly gross exceeds £2,274.58. You repay 9% of the excess only. So earning £3,000/month: £3,000 - £2,274.58 = £725.42 × 9% = £65.29 monthly repayment. HMRC notifies your employer automatically — you do not need to do anything once your loan is registered.
What is the employer's NI contribution shown on my payslip?
Some employers show their NI contribution on your payslip for transparency — it is the amount they pay in addition to your wages, at a rate of 13.8% on your earnings above the Secondary Threshold (£9,100/year in 2025/26). This does not come out of your salary; it is an additional cost to the employer on top of your gross pay. If you use salary sacrifice for pension, you can reduce your employer's NI bill too, and some employers pass on part of this saving to you.