PaycheckUK
2026/27 tax year
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Deeper explainers for the topics behind your payslip — how PAYE actually works, why salary sacrifice beats standard pensions, and what the 60% tax trap is. All examples use 2026/27 rates.

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How PAYE income tax works

Pay As You Earn (PAYE) is HMRC's system for collecting income tax directly from your wages. Here's what's actually happening behind the numbers on your payslip.

The Personal Allowance

Every UK taxpayer (with some high-earner exceptions) gets a tax-free chunk of income called the Personal Allowance. For 2026/27 this is £12,570. You only start paying income tax on earnings above that.

Tax bands (England, Wales & NI)

  • 0% on £0 – £12,570 (Personal Allowance)
  • 20% on £12,571 – £50,270 (basic rate)
  • 40% on £50,271 – £125,140 (higher rate)
  • 45% above £125,140 (additional rate)

Worked example: £45,000 salary

On a £45,000 gross salary you pay 0% on the first £12,570 and 20% on the remaining £32,430 — that's £6,486 of income tax for the year. Add NI and any student loan or pension deductions to get your take-home.

Tax codes

Your tax code (e.g. 1257L) tells your employer how much allowance to apply. A wrong code is one of the most common reasons for over- or under-paying tax — always check it on your payslip.

National Insurance, in plain English

National Insurance is technically a separate contribution from income tax — it funds the State Pension and certain benefits — but in practice it feels like a second tax on your wages.

What employees pay (Class 1)

  • 0% on earnings below £12,570 (the Primary Threshold)
  • 8% on earnings £12,570 – £50,270 (the Upper Earnings Limit)
  • 2% on earnings above £50,270

Why the rate drops at the top

NI is regressive at the top: once you cross £50,270 your marginal NI falls from 8% to 2%. Combined with income tax, this is why the leap from basic rate (20% + 8% = 28%) to higher rate (40% + 2% = 42%) is smaller than it looks.

Why NI matters beyond your payslip

Each qualifying year of NI contributions builds entitlement to the State Pension. You generally need 35 qualifying years for the full new State Pension, and at least 10 to get anything at all.

Salary sacrifice: the most tax-efficient pay rise

Salary sacrifice swaps part of your gross pay for a pension contribution (or other benefit). Because your gross is reduced, you pay less income tax AND less NI — usually beating standard pension contributions.

How it works

You agree with your employer to lower your contractual salary by, say, £3,000. They pay that £3,000 directly into your pension. Your gross pay is now £3,000 lower, so you avoid both 20–40% income tax and 8% NI on it.

The numbers (basic-rate taxpayer)

On £3,000 sacrificed: you save £600 in income tax and £240 in NI, while still getting the full £3,000 in your pension. Effective cost to take-home pay: just £2,160.

Watch-outs

Sacrificing too much can push your pay below minimum wage (not allowed) or reduce mortgage borrowing capacity. It can also affect maternity pay and life insurance multiples — check with your employer's scheme docs.

Student loans: which plan are you on?

Student loan repayments are deducted through PAYE once your earnings cross a plan-specific threshold. The plan depends on when and where you studied.

The five plans at a glance

  • Plan 1 — pre-2012 England/Wales, current NI. 9% over ~£26,065.
  • Plan 2 — England/Wales, 2012 to Aug 2023. 9% over ~£28,470.
  • Plan 4 — Scotland. 9% over ~£32,745.
  • Plan 5 — England, Aug 2023 onwards. 9% over ~£25,000.
  • PGL — Postgraduate. 6% over ~£21,000, paid alongside the above.

It's not really a debt, it's a graduate tax

Repayments are 9% of earnings above the threshold, regardless of the balance. You stop paying if your salary drops below it, and any remaining balance is wiped after 25–40 years depending on the plan. For most graduates, the headline balance never gets cleared in full.

The 60% tax trap (£100k – £125,140)

Earning between £100,000 and £125,140? You're in one of the UK's quirkiest tax zones, where every extra pound costs you 60p.

Why 60%, not 40%

Above £100,000 your Personal Allowance shrinks by £1 for every £2 earned. So an extra £1 earned is taxed at the 40% higher rate AND increases the taxable portion of your existing income — adding up to an effective marginal rate of around 60% (62% with NI).

The fix: pension contributions

Pension contributions reduce your "adjusted net income," which is what HMRC uses to calculate the taper. Sacrificing or contributing enough to bring your income back below £100,000 effectively gets you 60p of pension funding for every £1 of forfeited take-home.

Statutory pay: SMP, SPP and SSP

When life happens — illness, a new baby, a parental leave — there's a minimum your employer must pay you. Many companies top this up, but the statutory floor is the law.

Statutory Sick Pay (SSP)

Paid for up to 28 weeks at £123.25/week (2026 rate), provided you earn at least the Lower Earnings Limit. Many employers offer enhanced contractual sick pay on top.

Statutory Maternity Pay (SMP)

Paid for up to 39 weeks: 90% of your average weekly earnings for the first 6 weeks, then the lower of £194.32/week or 90% of earnings for the remaining 33 weeks.

Tax and NI still apply

Statutory payments are treated as earnings — they're subject to PAYE income tax and National Insurance just like normal wages.

Try the numbers on your own salary

Plug your own figures into the calculator and see the breakdown live.

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