A practical glossary for salary planning and offer comparisons. Every definition includes the actual 2026/27 figures so you can apply it directly to your own situation.
Written and reviewed by James Whitfield · Last reviewed: 20 March 2026 · Methodology
PAYE is the system UK employers use to deduct Income Tax and National Insurance from your salary before it reaches your bank account. Your employer applies your tax code each pay period to calculate how much to withhold. The cumulative nature of PAYE means that if you are over- or under-taxed early in the year, subsequent payslips automatically correct the balance. Most employees on a standard salary never need to submit a Self Assessment return — PAYE handles everything. PAYE applies to all employment income including regular salary, overtime, bonuses and commission.
Practical relevance: if your PAYE deductions look wrong — for example after starting a new job mid-year — the issue is almost always the tax code. Check your payslip's tax code and compare it to what HMRC says it should be.
The personal allowance is the amount of income you can earn each tax year before Income Tax is due. For 2026/27 it is £12,570. This is represented in your tax code as 1257L — the number being the allowance divided by ten. No Income Tax is due on the first £12,570 of earnings.
The allowance begins to taper for incomes above £100,000: £1 of allowance is lost for every £2 of income above the threshold. The allowance reaches £0 at £125,140. Within this taper zone (£100,000–£125,140) the effective marginal Income Tax rate rises to 60%, because each extra pound of income is both taxed at 40% and also erodes allowance that was protecting other income.
Example: a salary of £110,000 has a reduced personal allowance of £7,570 (£12,570 minus £5,000), since £10,000 above £100,000 withdraws £5,000 of allowance. A pension contribution of £10,000+ can restore the full allowance.
The marginal tax rate is the rate applied to your next pound of income — not to all your income. UK Income Tax uses a progressive band structure, so only the portion of income within each band is taxed at that band's rate. The 2026/27 bands for England/Wales/NI are:
Someone earning £55,000 pays 40% only on the £4,730 above the £50,270 threshold — not on their whole salary. Their effective deduction rate is much lower than 40%.
Practical relevance: the marginal rate tells you how much of a pay rise or bonus you will keep. At the basic rate (20%), each extra £1,000 gross adds roughly £800 net (after 20% tax and no NI saving at upper rates). At the higher rate (40%), each extra £1,000 gross adds roughly £580 net (after 40% tax and 2% NI).
The effective deduction rate is total deductions (Income Tax + NI) divided by gross salary. It is the single most useful number for monthly budgeting because it tells you what percentage of gross pay you actually keep. It is always lower than the marginal rate because lower-income slices are taxed at lower rates — or not at all.
| Gross salary | Income Tax | NI | Effective rate | Take-home |
|---|---|---|---|---|
| £25,000 | £2,486 | £1,234 | 14.9% | £21,280 |
| £35,000 | £4,486 | £1,794 | 17.9% | £28,720 |
| £50,000 | £7,486 | £3,016 | 21.0% | £39,498 |
| £60,000 | £11,432 | £3,197 | 24.4% | £45,371 |
| £80,000 | £19,432 | £3,557 | 28.7% | £57,011 |
| £100,000 | £27,432 | £3,917 | 31.3% | £68,651 |
Estimates using 2026/27 rates, tax code 1257L, NI category A, no student loan, no pension. England/Wales/NI.
Salary sacrifice is a formal payroll arrangement where you give up part of your gross salary before Income Tax and National Insurance are calculated, usually in exchange for a pension contribution. Because the contribution reduces the gross pay figure before any deductions are applied, you save both Income Tax and employee NI on the sacrificed amount.
Example at the basic rate (20%): a £1,000 salary sacrifice reduces monthly gross by £1,000 but reduces net take-home by only approximately £720 (saving £200 in Income Tax and £80 in NI). At the higher rate (40%): the same £1,000 sacrifice reduces take-home by approximately £580.
Standard pension contributions (relief at source) give Income Tax relief but not NI relief. Salary sacrifice gives both. For a basic-rate taxpayer, salary sacrifice saves approximately 8% more per £1 contributed than standard relief at source. For higher-rate taxpayers the NI saving is smaller relative to the tax saving, but still material.
Caution: salary sacrifice reduces contractual salary, which can affect mortgage affordability assessments, statutory maternity/paternity pay calculations and life assurance cover that is tied to salary. Check these before opting in to a large sacrifice amount.
National Insurance is a separate deduction from Income Tax, with its own thresholds and rates. Employee Class 1 NI rates for 2026/27:
NI is not affected by region — the same rates apply in Scotland, England, Wales and Northern Ireland. NI is calculated on a pay-period basis (weekly or monthly), not cumulatively like Income Tax. This means an unusually high-pay month can result in higher NI than expected.
At £50,000, annual employee NI is £3,016. At £60,000 it is £3,197 — the 2% upper rate on the extra £10,000 adds only £200, much less than the 40% higher-rate Income Tax on the same slice.
Employer NI is separate (13.8% above the Secondary Threshold, £9,100/year). It does not affect employee take-home pay directly but influences the total employment cost your employer sees.
Student loan repayments are deducted by PAYE on top of Income Tax and NI, using a threshold-based system. The plan you are on depends on when and where you studied. 2026/27 thresholds:
| Plan | Who it covers | Threshold | Rate |
|---|---|---|---|
| Plan 1 | Pre-2012 England/Wales, Northern Ireland, some Scottish | £24,990 | 9% |
| Plan 2 | English/Welsh, started 2012–2022 | £27,295 | 9% |
| Plan 4 | Scottish students (post-2012) | £31,395 | 9% |
| Plan 5 | England, started from September 2023 | £25,000 | 9% |
| Postgraduate Loan | Masters/PhD loans | £21,000 | 6% |
Example: Plan 2 at £35,000 gross means repayments of 9% × (£35,000 − £27,295) = £693/year or £58/month. If you hold both an undergraduate plan and a Postgraduate Loan, both repayments are calculated separately and deducted simultaneously. Check your plan via the Student Loans Company portal at slc.co.uk.
A tax code tells your employer how much personal allowance to apply when calculating PAYE deductions. The standard code for 2026/27 is 1257L — the number (1257) is the personal allowance (£12,570) divided by ten, and the letter (L) means you receive the standard personal allowance.
Common code variations:
If your income is above £100,000, HMRC issues a reduced tax code to reflect the tapered personal allowance. At £110,000, the code would be approximately 757L. If your tax code is wrong, your monthly deductions will be incorrect — check your payslip and compare with your HMRC Personal Tax Account.
You can check and update your tax code via the HMRC Personal Tax Account at gov.uk. Common reasons for a wrong code include starting a new job after a gap, having company benefits, or HMRC receiving incorrect prior-year information.
The UK tax year runs from 6 April to 5 April the following year. The current tax year is 2026/27 (6 April 2025 – 5 April 2026). HMRC announces rate changes for the following tax year in the Budget, typically in the autumn or spring before the new year begins.
All rates, thresholds and take-home pay figures on this site use 2026/27 values. Figures for prior years are not directly comparable because bands and thresholds change each year.
A P60 is an end-of-year summary of your total earnings and deductions for a tax year, issued by your employer in May or June. It shows total gross pay, total Income Tax paid and total NI paid. Use your P60 to reconcile your year's deductions, complete a Self Assessment return (if applicable), or confirm final-salary mortgage or rental applications.
A P45 is issued when you leave an employment. It shows earnings and tax paid to the date of leaving and must be passed to your new employer so they can set your tax code correctly. Without a P45, your new employer may use an emergency tax code (1257L W1/M1) that taxes each pay period independently rather than cumulatively, which can result in overpayment in early months.
Gross pay is your salary or wage before any deductions. Net pay (take-home pay) is what remains after Income Tax, National Insurance, student loan repayments and pension contributions have been deducted. Job advertisements in the UK quote gross annual salary — the net amount you actually receive is always lower.
Example: a gross salary of £40,000 in England gives net pay of approximately £31,060/year (£2,588/month) under 2026/27 default PAYE assumptions — an effective deduction rate of around 22.3%. The gap between gross and net widens at higher salaries as more income falls into higher tax bands.
Use the calculator and salary pages to see how these terms translate into actual £ figures for your gross pay.