Quick answer
- PAYE is the payroll system used to collect Income Tax from employment income.
- National Insurance is a separate payroll deduction with its own thresholds and rates.
- Your tax code, salary level, pension method, student loan plan and region can all affect take-home pay.
- The easiest way to estimate the combined effect is to use a take-home pay calculator.
When people ask why their take-home pay is lower than their salary, the answer usually starts with PAYE Income Tax and employee National Insurance. They are deducted before wages are paid, so your bank payment is lower than your gross pay.
Estimate your actual monthly pay
Use the take-home pay calculator to combine PAYE tax, NI, pension and student loan deductions.
What is PAYE?
PAYE stands for Pay As You Earn. It is the system employers use to deduct Income Tax from wages before paying employees.
Payroll uses your tax code and taxable pay to estimate how much Income Tax should come off each payslip. For many employees, this means tax is spread across the year instead of being paid in one lump sum.
Your gross pay is calculated
This can include salary, overtime, bonus, commission or other taxable employment pay.
Your tax code is applied
The tax code tells payroll how much tax-free pay to apply before Income Tax is deducted.
PAYE tax is deducted
Income Tax is taken through payroll before your net pay is sent to your bank account.
Personal Allowance and tax bands
The standard UK Personal Allowance for 2026/27 is £12,570. This is the amount of income you can usually receive before paying Income Tax, although the allowance can be reduced for high earners.
For England, Wales and Northern Ireland in 2026/27, taxable income above the Personal Allowance is taxed at 20% within the basic-rate band, 40% in the higher-rate band and 45% in the additional-rate band. Scotland has different income tax bands for non-savings, non-dividend income.
Standard annual allowance for 2026/27.
England, Wales and Northern Ireland basic-rate band.
Applies above the basic-rate band in England, Wales and Northern Ireland.
| Band | Rate | England, Wales and Northern Ireland taxable income after allowances |
|---|---|---|
| Basic rate | 20% | Up to £37,700 |
| Higher rate | 40% | £37,701 to £125,140 |
| Additional rate | 45% | Above £125,140 |
What is National Insurance?
National Insurance is separate from Income Tax. Employees usually pay Class 1 National Insurance through payroll once earnings go above the employee primary threshold.
For 2026/27, the employee primary threshold is £12,570 per year. For a standard employee on category A, employee NI is 8% between the primary threshold and upper earnings limit, then 2% above the upper earnings limit.
| Employee NI threshold/rate | 2026/27 amount or rate | What it means |
|---|---|---|
| Primary threshold | £12,570 per year | Employees start paying NI above this earnings level. |
| Upper earnings limit | £50,270 per year | Employee NI rate falls above this point. |
| Main employee rate | 8% | Standard category A rate between threshold and upper earnings limit. |
| Additional employee rate | 2% | Standard category A rate above the upper earnings limit. |
Income Tax vs National Insurance
Income Tax and National Insurance can feel similar because both reduce take-home pay, but they are not the same deduction.
| Feature | PAYE Income Tax | Employee National Insurance |
|---|---|---|
| What it is | Tax on taxable income. | Contribution linked to employment earnings. |
| Payroll basis | Uses tax code and income tax bands. | Uses NI category, thresholds and earnings period. |
| Regional variation | Scotland has different income tax bands for employment income. | Employee NI thresholds/rates are generally UK-wide. |
| Common payslip label | PAYE, Tax or Income Tax. | NI, NIC or National Insurance. |
Simple example: how salary becomes take-home pay
Suppose a salary is £35,000 per year. Payroll does not simply divide £35,000 by 12 and send that amount to the employee. It first applies payroll rules.
- Gross annual salary is converted into the relevant pay-period amount.
- The tax code applies a tax-free allowance where available.
- Income Tax is calculated on taxable pay above the allowance.
- Employee National Insurance is calculated using NI thresholds and rates.
- Pension, student loan or other deductions may also come off.
- The final amount is net pay, also called take-home pay.
take-home pay =
gross pay
- PAYE Income Tax
- employee National Insurance
- pension contributions
- student loan repayments
- other deductions
Why your tax code matters
Your tax code tells payroll how much tax-free pay to apply. The common emergency-style code 1257L reflects the standard Personal Allowance, but not everyone has that code.
A tax code can change because of benefits, underpaid tax, multiple jobs, pension income or HMRC adjustments. If the tax code is wrong, your monthly PAYE deduction can be too high or too low.
Tip: if your take-home pay changes unexpectedly, check your tax code, pension contribution, student loan plan and any one-off payments or deductions.
How pension contributions interact with PAYE and NI
Pension contributions can affect take-home pay in different ways depending on the pension method. Normal net pay, relief at source and salary sacrifice arrangements can produce different payroll results.
Salary sacrifice can reduce contractual taxable pay and may reduce employee National Insurance because the employee gives up part of salary in exchange for an employer pension contribution. This is why two people on the same salary can have different take-home pay if their pension method differs.
Compare pension deduction methods
Read the guide to salary sacrifice vs normal pension contributions.
Student loans and take-home pay
Student loan repayments are another common reason net pay differs from gross pay. Repayments depend on the plan type and income above the relevant threshold.
Student loan deductions are separate from PAYE tax and National Insurance, but they are often collected through payroll at the same time. That means a pay rise, bonus or overtime can increase student loan deductions as well as tax and NI.
Why PAYE and NI matter when comparing job offers
A salary offer is usually advertised as gross pay. To understand what it means in real life, estimate net monthly pay after PAYE tax, National Insurance and other deductions.
This matters when comparing a pay rise, new job, overtime, bonus or salary sacrifice pension arrangement. A bigger gross salary can still feel smaller than expected once deductions, travel costs and working hours are considered.
Got a new salary offer?
Calculate the gross rise first, then check the after-tax take-home pay.
Related glossary terms
These payroll terms help explain how salary deductions work.
PAYE and National Insurance FAQs
Is PAYE the same as tax?
PAYE is the system used to collect Income Tax through payroll. It is not a separate tax, but it is how many employees pay Income Tax.
Do I pay both Income Tax and National Insurance?
Many employees pay both, but they use separate rules. Whether you pay either deduction depends on income, tax code, NI category and other circumstances.
Why did my take-home pay change when my salary did not?
Possible reasons include a tax code change, pension change, student loan deduction, bonus, overtime, payroll correction or one-off deduction.
Does Scotland use the same income tax bands?
No. Scotland has different income tax bands for employment income, although the UK Personal Allowance is still relevant in many cases.