Question 1

What does my tax code mean?

Accepted Answer

Your tax code tells your employer how much of your income is tax-free before Income Tax is deducted. The most common code is 1257L, where the number 1257 represents your tax-free personal allowance of £12,570 divided by 10. The letter L means you are entitled to the standard personal allowance with no adjustments. Other common letters include M and N, which relate to the Marriage Allowance transfer — M means you have received 10% of your partner's allowance, N means you have transferred 10% of yours. A K code means you have income that has used up your personal allowance entirely, such as untaxed benefits or pension income. W1 or M1 at the end of a code indicates a non-cumulative basis — tax is calculated on each pay period in isolation rather than cumulatively across the year.

Question 2

How is National Insurance calculated for employees?

Accepted Answer

Employee National Insurance contributions for 2026/27 are calculated on gross earnings above the Primary Threshold of £12,570 per year (£1,047.50 per month). You pay 8% on earnings between the Primary Threshold and the Upper Earnings Limit of £50,270 per year, and 2% on any earnings above £50,270. Unlike Income Tax, National Insurance is calculated on a non-cumulative basis — each pay period is calculated independently rather than being adjusted across the year. This means that if your earnings vary significantly from month to month, you may pay a different effective NI rate compared to an employee on the same annual salary who receives it in equal monthly instalments.

Question 3

What is the difference between salary sacrifice and net pay pension?

Accepted Answer

Salary sacrifice is the most tax-efficient pension arrangement for most employees. Under salary sacrifice, your pension contribution is deducted before your gross salary is reported to HMRC, which means you pay Income Tax and National Insurance on a lower figure. This saves both Income Tax and National Insurance, making it more valuable than other arrangements. Under a net pay arrangement, the pension contribution is deducted from your gross pay before tax is calculated, saving Income Tax but not National Insurance. Under relief at source, your pension contribution is taken from your net (after-tax) pay and the pension provider claims basic rate tax relief on your behalf, adding 25% to your contribution — but you do not benefit from NI savings, and higher rate taxpayers must claim the additional relief through Self Assessment.

Question 4

Why does Scotland have different income tax rates?

Accepted Answer

Scotland has the power to set its own income tax rates and bands through the Scottish Parliament via the Scotland Act 2016. This means Scottish taxpayers pay different rates on their non-savings, non-dividend income compared to taxpayers elsewhere in the UK. Scotland currently has five income tax bands — starter, basic, intermediate, higher, and advanced — compared to three in the rest of the UK. The higher rate in Scotland starts at a lower threshold than in England, Wales, and Northern Ireland, and the higher rate itself is 42% rather than 40%. National Insurance contributions are the same across the entire UK regardless of where you live and work — it is only Income Tax that differs. The Scottish rates apply to you if your main home is in Scotland for the majority of the tax year.

Question 5

What is the Personal Allowance for 2026/27?

Accepted Answer

The standard Personal Allowance for 2026/27 remains at £12,570 — the amount of income you can earn before paying any Income Tax. This allowance has been frozen since 2021 and is set to remain frozen until at least April 2028, meaning that as wages rise with inflation, more people are gradually being pulled into higher tax bands — a process known as fiscal drag. For higher earners, the Personal Allowance is tapered away by £1 for every £2 of income above £100,000, meaning it is fully removed once income reaches £125,140. At that point, an effective 60% marginal tax rate applies on income between £100,000 and £125,140, making it a particularly important planning consideration for people approaching that income level.

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PAYE Take-Home Pay Calculator — UK 2026/27

ABOUT PAYE SALARIES

What does my tax code mean?

How is National Insurance calculated for employees?

What is the difference between salary sacrifice and net pay pension?

Why does Scotland have different income tax rates?

What is the Personal Allowance for 2026/27?