UK take-home pay guide 2026: how income tax and NI reduce your salary

Salary

How PAYE deductions are calculated

Pay As You Earn (PAYE) is the system through which employers deduct income tax and National Insurance from employees' gross pay before paying the net amount to the employee. HMRC issues each employee a tax code that encodes their personal allowance and any adjustments (for example, a reduction for a company car benefit or an increase for the marriage allowance). The employer applies the tax code to calculate the tax due on each pay period's earnings. For a standard employee on the 1257L code (the standard personal allowance code for 2025/26), no tax is deducted on annual earnings up to £12,570; 20 percent is deducted on earnings between £12,571 and £50,270; 40 percent on the next slice up to £125,140; and 45 percent above that. These deductions are cumulative across the tax year - HMRC calculates the correct amount based on year-to-date earnings, not just each individual pay period.

National Insurance: employee and employer contributions

Employee National Insurance (Class 1 primary contributions) is charged on earnings between the primary threshold (£12,570 per year in 2025/26) and the upper earnings limit (£50,270 per year) at 8 percent, and at 2 percent on earnings above the UEL. There is no NI on earnings below the primary threshold. For an employee earning £30,000, employee NI is approximately 8 percent of £17,430 (earnings between £12,570 and £30,000) = £1,394 per year. Employer NI (Class 1 secondary) is charged at 15 percent on employee earnings above the secondary threshold (£9,100 per year from April 2025, following the April 2025 Budget increase from £9,100). The employment allowance reduces the employer's NI liability by up to £10,500 per year for eligible businesses (increased from £5,000 in the 2024 Budget). Employer NI is not deducted from the employee's pay; it is a cost to the employer on top of gross salary.

The personal allowance taper and the 60 percent marginal rate

One of the most counterintuitive features of the UK income tax system is the effective 60 percent marginal tax rate that applies to income between £100,000 and £125,140. In this range, the personal allowance is reduced by £1 for every £2 of adjusted net income above £100,000. This means that each additional £2 of income generates £1 more income taxed at 40 percent (due to the reduction in the personal allowance) in addition to the 40 percent rate on the additional income itself - creating an effective marginal rate of 60 percent. For someone whose income is expected to fall in this range, pension contributions can be a particularly valuable strategy: contributions reduce adjusted net income, potentially restoring some or all of the personal allowance and reducing the effective marginal rate from 60 to 40 percent. Salary sacrifice arrangements (where contributions are made from pre-tax pay) also save employer NI, which is why many employers incentivise salary sacrifice pension contributions.

Student loan repayments: how they interact with take-home pay

Student loan repayments are collected through PAYE alongside income tax and NI for employees. The repayment rate is 9 percent of income above the relevant plan threshold. For Plan 2 loans (taken out between 2012 and 2022), the threshold is £27,295 in 2025/26. For Plan 5 loans (taken out from 2023/24), the threshold is £25,000. For Plan 1 loans (taken out before 2012), the threshold is £24,990. On a salary of £40,000 with a Plan 2 loan, the annual repayment is 9 percent of (£40,000 - £27,295) = 9 percent of £12,705 = £1,143 per year. Repayments do not reduce taxable pay; they are separate to income tax and NI and do not attract any tax relief. Student loan balances carry interest at RPI plus up to 3 percent for Plan 2 (subject to income) and RPI for Plan 1; Plan 5 loans carry interest at RPI plus up to 7.3 percent during study and RPI after graduation (SLC interest rates 2025/26).

Pension contributions and take-home pay

Pension contributions affect take-home pay differently depending on how they are structured. Under a net pay arrangement (common in workplace schemes), pension contributions are taken from gross pay before PAYE is calculated, reducing taxable income and providing automatic tax relief at the marginal rate. Under a relief at source arrangement, contributions are taken from net pay and HMRC adds basic-rate relief (20 percent) to the pension; higher-rate taxpayers claim additional relief through self-assessment. Salary sacrifice arrangements - where the employee formally gives up salary in exchange for employer pension contributions - reduce both employee NI and employer NI, as well as income tax. On a £5,000 salary sacrifice at the basic rate, the employee saves approximately £400 in NI (8 percent of £5,000) in addition to the income tax saving; the employer saves NI at 15 percent on the sacrificed amount. Salary sacrifice requires a formal agreement and reduces the stated gross salary for mortgage affordability assessment purposes, which is worth noting for those planning to apply for a mortgage.

Comparing gross to net: worked examples

To illustrate the cumulative effect of deductions, consider a full-time employee earning £35,000 gross with a Plan 2 student loan and contributing 5 percent to pension via net pay. Income tax: 20 percent on (£35,000 less £1,750 pension contribution less £12,570 personal allowance) = 20 percent of £20,680 = £4,136. Employee NI: 8 percent on (£35,000 less £12,570) = 8 percent of £22,430 = £1,794. Student loan: 9 percent on (£35,000 less £27,295) = 9 percent of £7,705 = £693. Pension contribution (from gross pay before tax): £1,750. Total deductions: approximately £8,373. Take-home pay: approximately £26,627, or approximately £2,219 per month. This example illustrates why PAYE workers with student loans and pension contributions see take-home pay significantly below the gross salary figure.

Related guides

• UK tax codes 2026 explained
• UK self-assessment guide 2026
• UK salary calculator hub →

Frequently asked questions

How do I find out what tax code I am on?

Your tax code appears on your payslip next to the tax deduction line. It is also shown on any P60 or P45 you receive, and in your personal tax account on gov.uk. The most common code is 1257L, which represents the standard personal allowance of £12,570. If your code is different - for example, a W1/M1 emergency code, or a higher or lower number - you should check with HMRC to ensure it is correct, as an incorrect tax code leads to over- or under-payment of tax.

What is the 60 percent tax trap and how do I avoid it?

The 60 percent effective marginal rate applies to income between £100,000 and £125,140 because the personal allowance is tapered by £1 for every £2 of income above £100,000. The most effective mitigation is to make pension contributions (or Gift Aid donations) that reduce adjusted net income back below £100,000. On a £5,000 pension contribution at £100,000 income, the effective tax saving is £3,000 (60 percent of £5,000) rather than the standard £2,000 (40 percent). The annual allowance of £60,000 for pension contributions provides significant headroom for those in this income range.

Do I pay NI on my pension contributions?

It depends on the arrangement. Under a net pay arrangement, employee pension contributions come from post-NI pay - NI has already been deducted before the pension contribution is made. Under a salary sacrifice arrangement, contributions are made from pre-NI pay, so you save NI at 8 percent (basic rate) on the sacrificed amount as well as income tax. Employer contributions are not subject to employee NI regardless of the method.

Does the personal allowance apply to all types of income?

The personal allowance applies to total taxable income from all sources in the tax year - employment, self-employment, pensions, interest and dividends (though dividends have their own separate allowance of £500). The personal allowance is allocated first against non-savings income, then savings income, then dividend income. This ordering is set by HMRC and determines which income is taxed at which rate; it matters most for those with mixed income types.

My employer has made an error in my PAYE deductions. How do I get the correct amount back?

Contact your payroll department and request a correction. If too much tax has been deducted in a current year, the employer can adjust the deduction in a future pay period within the same tax year, and your year-to-date deductions will reconcile correctly by April. If the tax year has ended and you have overpaid, HMRC will either send a P800 tax calculation showing the refund owed, or you can claim the refund through your personal tax account. Contact HMRC directly if the overpayment is significant and not automatically identified.

How we verified this guide

Income tax rates and personal allowance for 2025/26 were confirmed from HMRC's published income tax rates. Employee NI rates and thresholds were confirmed from HMRC's National Insurance rates guide updated for 2025/26, including the April 2025 employer NI rate change. Student loan repayment thresholds were confirmed from the Student Loans Company published thresholds for 2025/26.

Primary sources

• HMRC - Income tax rates and allowances 2025/26
• HMRC - National Insurance rates and thresholds
• Student Loans Company - Repayment thresholds 2025/26
• MoneyHelper - Income tax and National Insurance
• Citizens Advice - Income tax introduction

Last reviewed: May 2026.