PAYE, tax codes and National Insurance

When you work in the UK, your employer automatically deducts income tax and National Insurance from your pay through the Pay As You Earn system. Understanding how PAYE works, what your tax code means, and which National Insurance class you belong to will help you check you are paying the right amount and spot problems early.

How PAYE works and the personal allowance

PAYE (Pay As You Earn) is the system by which employers collect income tax and National Insurance directly from your wages before you receive them. You do not have to wait until the end of the year to pay a tax bill—it happens in instalments every payday.

The foundation of PAYE is your personal allowance: the amount of income you can earn each year without paying any income tax. For the 2024/25 and 2025/26 tax years, the personal allowance is £12,570. If you earn less than this, you owe no income tax at all. The personal allowance has been frozen at this level since 2021/22 and will stay frozen until at least April 2028.

Your personal allowance is spread evenly across your pay periods (weekly, monthly, or however often you are paid) so you receive a small tax-free portion in each payslip. Your employer's payroll software does this automatically, working out exactly how much you owe on each payment.

Tax bands and rates

Once your income exceeds the personal allowance, you pay tax in bands. Each band is taxed at a different rate, but you only pay that rate on income within that band—not on your entire salary.

• Basic rate (£12,571 to £50,270): 20%
• Higher rate (£50,271 to £125,140): 40%
• Additional rate (over £125,140): 45%

For example, if you earn £60,000, you pay nothing on the first £12,570, then 20% on the next £37,700 (up to £50,270), and 40% only on the slice between £50,271 and £60,000. Scotland sets its own rates—it has six tax bands with rates ranging from 19% to 48%—but the personal allowance is the same across all parts of the UK.

Tax codes explained

Your tax code is the four or five character code your employer uses to calculate how much income tax to deduct from your pay each period. You can find it on every payslip, on your P60 at the end of the tax year, and in your Personal Tax Account on GOV.UK.

Standard and common tax codes

The most common tax code is 1257L, which applies to most people with one job or a pension. The number 1257 is calculated by dividing your personal allowance (£12,570) by 10, and the letter L indicates you are entitled to the standard personal allowance.

Other codes reflect different situations. If you have earnings over £100,000, your personal allowance is reduced by £1 for every £2 you earn above that threshold, disappearing entirely at £125,140. In that case you would be on code 0T, meaning no personal allowance and tax rates that reflect your total earnings level. If you have a second job or income and have already used your personal allowance elsewhere, you may be on code BR (basic rate), which means all income from that source is taxed at 20%.

The emergency tax code trap

An emergency tax code is a temporary code HMRC issues when it does not have enough information about your employment history or income. It is most common when you start a new job, change employers without providing a P45, or begin receiving a pension without full details.

Emergency codes look like 1257L W1, 1257L M1, 1257L X, BR, or 0T. The W1, M1, and X suffixes are the giveaway—they indicate non-cumulative coding, meaning your tax allowance is calculated only for that pay period, as if it were the first week or month of the year. This causes you to overpay tax significantly, especially if the code stays in place for several months.

How to fix a wrong tax code

Once you realise your tax code is wrong, the fix is straightforward. Log in to your Personal Tax Account on GOV.UK and update your details: your employer, pension income, any company benefits, start date, and estimated annual income. HMRC will then issue a new tax code to your employer, and your next payslip should reflect the correct deduction.

If you have overpaid tax, you can claim it back. HMRC often refunds automatically once the correct code is in place, but if you need to chase it, you can submit a P87 form for smaller claims or include it in your Self Assessment return. Refunds typically take four to six weeks once your code is corrected.

National Insurance classes and what they pay for

National Insurance is a contribution paid by employees, employers, and the self-employed. Different groups pay different 'classes' of National Insurance depending on how they work. The contributions go towards qualifying you for state benefits, especially the State Pension, and also help fund the NHS.

Class 1: For employees

If you are an employee, you pay Class 1 National Insurance contributions. These are deducted from your salary automatically through PAYE, alongside income tax. You start paying Class 1 NI when your earnings exceed £12,570 per year (the primary threshold), but the actual deduction begins at about £1,048 per month or £242 per week.

The employee rate is 8% on earnings between the primary threshold and the upper earnings limit (£50,270 per year or £4,189 per month), and then 2% on earnings above that. Class 1 contributions count towards your State Pension, Employment & Support Allowance, Maternity Allowance, and other contributory benefits. You stop paying employee NI once you reach State Pension age, though your employer continues to pay employer National Insurance on your behalf.

Class 2: For the self-employed (simplified)

If you are self-employed, you pay Class 2 National Insurance, a flat-rate weekly contribution. Since April 2024, Class 2 contributions are voluntary or 'treated as paid' for most people: if your profits are above £6,725 per year (the small profits threshold), you are not required to pay but your record is protected. If your profits are between £6,725 and £12,570, you receive automatic National Insurance credits that count towards your State Pension without paying anything.

If your profits fall below £6,725, you can choose to pay Class 2 voluntarily (£3.50 per week for 2025/26) to maintain your entitlement to contributory benefits. Class 2 contributions are collected through Self Assessment, alongside your tax bill.

Class 4: For the self-employed (earnings-related)

Alongside Class 2, self-employed people also pay Class 4 National Insurance if their profits exceed £12,570 per year. Class 4 is calculated as a percentage of your annual profit and paid through Self Assessment. For 2025/26, the rate is 6% on profits between £12,570 and £50,270, and 2% on profits above that. Class 4 contributions do not directly qualify you for any specific benefit, but they form part of your overall National Insurance record.

Class 3: Voluntary contributions for anyone

If you have gaps in your National Insurance record (perhaps you were not working, studying, or living abroad), you can fill them by paying Class 3 voluntary contributions. These are a flat weekly rate of £17.75 for 2025/26. Class 3 helps you qualify for the State Pension and certain other benefits without needing to be employed or self-employed. This is particularly useful for expats who have lived and worked outside the UK.

Key things to check on your payslip

• Your tax code (it should be 1257L if you have one job, or reflect your actual situation)
• That it does not end in W1, M1, or X (emergency indicators)
• That your gross and net pay are correct
• That income tax and National Insurance deductions are reasonable for your income level
• That your National Insurance number is shown and matches your official records

If your net pay drops unexpectedly, check your tax code first. If you think something is wrong, contact your payroll team or log into your Personal Tax Account on GOV.UK to see what HMRC has on file. Acting early means any overpayment is smaller and easier to recover.