Most UK employees never file a tax return, yet income tax touches every payslip. The reason both facts are true is PAYE: the employer deducts tax each pay period using a tax code, and the annual calculation happens in the background. Understanding the annual calculation is still what makes a payslip readable, a salary offer comparable, and a tax-code error visible. The figures here are the official ones — HMRC bands and thresholds, with the Scottish bands set by the Scottish Government — and the two tax years covered differ in one place only, which this guide states explicitly wherever it matters.

The bands and the personal allowance

The personal allowance is the amount most people can earn before paying income tax: £12,570 in both 2025/26 and 2026/27, set by the tax code (1257L is the standard code, the number being the allowance divided by ten). Above the allowance, England, Wales and Northern Ireland charge 20% on the first £37,700 of taxable income (up to £50,270 of gross income), 40% from £50,271 to £125,140, and 45% above £125,140. Each rate touches only the slice inside its band: a £60,000 salary pays 20% on £37,700 (£7,540) and 40% on £9,730 (£3,892), for income tax of £11,432 — not 40% of anything.

The taper is the exception that feels like a trap. Above £100,000 of adjusted net income, the personal allowance falls by £1 for every £2 of extra income, reaching zero at £125,140. Each extra £1 in that zone is taxed at 40% and also loses 50p of allowance, which is then taxed at 40% too — an effective 60% rate on income tax alone, plus 2% National Insurance. A £1,000 rise in the taper zone leaves only about £380 of take-home pay. Pension contributions and Gift Aid donations reduce adjusted net income and can restore allowance, which is why the taper zone is also the zone where pension planning pays best.

Scotland: six bands instead of three

Scotland sets its own rates and thresholds for earnings, self-employment and pension income, collected by HMRC under tax codes starting with S (S1257L). The rates are the same in both years: starter 19%, basic 20%, intermediate 21%, higher 42%, advanced 45% and top 48%. The thresholds moved in 2026/27: the starter band runs from £12,571 to £16,537 (2025/26: to £15,397) and the basic band to £29,526 (2025/26: to £27,491), with the intermediate band to £43,662, the higher band to £75,000, the advanced band to £125,140 and the top rate above. The personal allowance and its taper are UK-wide and identical in Scotland.

On a £60,000 salary, Scotland charges £13,182.05 of income tax against £11,432 in England, Wales and Northern Ireland, because the 42% higher rate starts at £43,663 rather than £50,270 and the 21% intermediate rate fills the gap below it. Savings and dividend income escape the difference entirely: they are taxed at UK-wide rates wherever the taxpayer lives, and National Insurance is the same across the UK. Residence, not workplace, decides Scottish taxpayer status — living in Scotland for most of the tax year makes the Scottish bands apply even if the job is in England.

PAYE and tax codes: how the annual calculation reaches your payslip

PAYE (Pay As You Earn) deducts tax each pay period as if the year’s pay will continue at the current rate, using the tax code to spread the allowance across periods. A monthly-paid employee’s code gives one-twelfth of the annual allowance each month, and the bands are applied cumulatively, so an uneven year — a bonus month, unpaid leave, a mid-year job change — is corrected as the year goes on rather than in a single April reckoning. That cumulative design is why most employees need no return: the system self-corrects, provided the code is right.

The code is therefore worth reading. The number is the allowance divided by ten; the letter says how it is applied. L is the standard allowance. M means Marriage Allowance received, N means it was transferred. BR taxes everything at 20%, D0 at 40% and D1 at 45% (42% and 48% in Scotland), 0T gives no allowance, K adds untaxed income to taxable pay, and NT means no tax is deducted. A code that differs from 1257L usually reflects an adjustment — benefits in kind, underpaid tax from an earlier year, transferred allowance — and the coding notice that accompanies it explains which. An error in the code is an error in every payslip until it is corrected, which is why the code, not the net pay, is the first thing to check when a payslip surprises you.

National Insurance: the second deduction, on its own rules

Employees pay Class 1 National Insurance at 8% on earnings between £12,570 and £50,270 a year, then 2% on everything above, with nothing due below £12,570. On a £60,000 salary that is 8% of £37,700 (£3,016) plus 2% of £9,730 (£194.60), totalling £3,210.60 — the figure that, with £11,432 of income tax, leaves £45,357.40 of take-home pay in England, Wales and Northern Ireland before any pension or student loan deduction. Unlike income tax, National Insurance is worked out per pay period, not cumulatively over the year, so a large payment in one period can attract National Insurance that a smoother pattern would not, and the annual figures are the sum of the periods, not a single annual calculation.

Employers separately pay 15% on earnings above £5,000 a year, which never appears on the payslip but is part of the cost of employing someone — £8,250 on a £60,000 salary, before the £10,500 Employment Allowance that eligible employers can claim. The self-employed pay different classes on profits, with their own thresholds, and the state pension entitlement that National Insurance buys depends on the record of contributions, not on the amount paid in any single year. None of this is income tax, and none of it is priced by the income-tax bands — but every payslip shows both, and reading either alone understates the gap between gross and net.

Other income: dividends, savings, rent, and pensions

Income stacks in a fixed order: non-savings income first (salary, rent, pension), then savings interest, then dividends on top. Each layer fills the bands from the bottom, so the rate on the top layer depends on everything beneath it. Dividends have a £500 allowance at 0%, then 10.75% in the basic-rate band, 35.75% at the higher rate and 39.35% at the additional rate. Savings interest has a starting-rate band of up to £5,000 at 0% when other taxable income is low, plus a personal savings allowance of £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers and £0 for additional-rate taxpayers, with the rest taxed at 20%, 40% or 45% as it fills the bands.

Rental income stacks as ordinary non-savings income, so rent that lands above £50,270 of total income is taxed at 40%, not 20% — and it counts toward the £100,000 taper, which is how a salary of £100,000 plus £20,000 of rent can leave an allowance of only £2,570. Pension contributions change the stack from below: salary sacrifice reduces salary before tax, National Insurance and student loan are worked out, saving all three; a net pay arrangement reduces only taxable pay; relief at source grosses a net contribution up by 25% into the pot and extends the basic-rate band. Student loans add a third deduction on top, at 9% above the plan threshold (£26,900 Plan 1, £29,385 Plan 2, £33,795 Plan 4, £25,000 Plan 5 for 2026/27) plus 6% above £21,000 for a postgraduate loan. The Salary Calculator UK on this site applies all three layers together, which is the only way the stack can be priced honestly.

Worked example: £35,000, step by step

A £35,000 salary in England, Wales or Northern Ireland, standard 1257L code, no pension or student loan. Taxable income is £35,000 − £12,570 = £22,430, all inside the basic-rate band: income tax is 20% × £22,430 = £4,486. National Insurance is 8% × £22,430 = £1,794.40. Take-home pay is £35,000 − £4,486 − £1,794.40 = £28,719.60 a year, or £2,393.30 a month. In Scotland the income tax is higher: 19% of £3,967 (£753.73) plus 20% of £12,989 (£2,597.80) plus 21% of £5,474 (£1,149.54) = £4,501.07, leaving £28,704.53 — a difference of just £15.07 a year at this salary, because the Scottish lower bands are close to the English ones at this level and diverge mainly higher up.

The example also shows why the marginal rate misleads. The £35,000 earner’s marginal rate is 20% for income tax (plus 8% National Insurance, 28% combined on the next pound), but the effective income-tax rate is 12.8% of gross pay. A £5,000 rise to £40,000 adds £1,000 of income tax and £400 of National Insurance, leaving £3,600 of the rise in hand. Nobody in the basic-rate band loses money by earning more; the taper zone, forty thousand pounds higher, is where that intuition finally breaks down, and only there.

Mistakes: the annual figure, the monthly figure, and the second job

Three errors recur. Annualising wrongly: multiplying a monthly net figure by 12 ignores that PAYE is cumulative and that bonuses, overtime and unpaid leave make months unequal; the annual bands price annual income, and the monthly figure is an instalment. Forgetting National Insurance: quoting an “after-tax” figure that deducts income tax only understates the gap to net pay by the whole National Insurance line. Second jobs: each employment applies the code it was given, and a second job on a BR or D0 code, or a code split across two jobs, can withhold at the wrong rate all year — the annual calculation on the return (or a coding review) is where the two jobs are finally added together, and the difference appears as a bill or a refund.

Bonuses deserve a note of their own. There is no separate bonus tax rate: a bonus is ordinary income in the pay period it is paid, taxed at the marginal rate for that period’s pay, with National Insurance on that period’s earnings. A large bonus in one month therefore looks heavily taxed on that payslip, and PAYE corrects the position over the rest of the year. Judging a bonus by one payslip is the same error as judging a salary by one month.

Frequently asked questions

What is the personal allowance for 2026/27?

£12,570 for most people, set by your tax code (1257L is the standard code). Above £100,000 of adjusted net income it falls by £1 for every £2 of extra income, reaching zero at £125,140. Scotland uses the same allowance, with different tax bands above it. The allowance is the same in 2025/26.

How much tax do I pay on a £60,000 salary?

In England, Wales and Northern Ireland on the standard code: income tax of £11,432.00 and National Insurance of £3,210.60, leaving take-home pay of £45,357.40 a year (£3,779.78 a month) before any pension or student loan deduction. In Scotland the same salary pays £13,182.05 of income tax, because the 42% higher rate starts at £43,663.

How is National Insurance worked out?

Employees pay Class 1 National Insurance at 8% on earnings between £12,570 and £50,270 a year, then 2% on everything above £50,270. It is worked out per pay period, not over the whole year. Employers separately pay 15% on earnings above £5,000 a year, which does not appear on your payslip.

Why does earning just over £100,000 cost so much in tax?

Because the personal allowance is withdrawn at the same time. Each extra £1 between £100,000 and £125,140 loses 50p of tax-free allowance, which is then taxed at 40%, adding 20p to the 40p of tax on the pound itself — a 60% effective rate, plus 2% National Insurance. A £1,000 rise in that zone leaves only about £380 of take-home pay.

What are the Scottish income tax rates for 2026/27?

Starter 19% (£12,571 to £16,537), basic 20% (to £29,526), intermediate 21% (to £43,662), higher 42% (to £75,000), advanced 45% (to £125,140), and top 48% above £125,140, on gross income with the full personal allowance. Savings and dividend income use UK-wide rates, and National Insurance is the same across the UK. In 2025/26 the starter and basic bands ended at £15,397 and £27,491.

Is a bonus taxed at a higher rate?

No. There is no separate bonus tax rate. A bonus is taxed as ordinary income in the pay period it is paid, at the marginal rate for that period’s pay, and National Insurance is charged on that period’s earnings. A large bonus in one month can therefore look heavily taxed in that payslip, with PAYE correcting over the rest of the year.