How Does Tax Work in the UK? A Plain Guide for Employees (2026/27)

If you are employed in the UK, income tax and National Insurance come out of your pay through PAYE before you are paid. Here is how the 2026/27 bands work, what your tax code means, two worked examples, what your payslip, P60 and P45 show and when you need a tax return.

By Tony Musso on Thu Oct 22 2026

If you work for an employer in the UK, you usually never fill in a tax form. Your employer works out your income tax and National Insurance and takes them out of your pay before it reaches your account. That system is called PAYE (Pay As You Earn), and it is how most employees pay tax.

This guide explains how income tax and National Insurance work for employees in the 2026/27 tax year, what your tax code means, how to read your payslip, P60 and P45, what else comes out of your pay and when you need to file a tax return yourself.

The tax year

The UK tax year runs from 6 April to 5 April. The 2026/27 tax year started on 6 April 2026 and ends on 5 April 2027. Allowances and bands apply to a whole tax year, and PAYE spreads them across your pay days.

Income tax: the personal allowance and bands

Most people can earn £12,570 a year before paying any income tax. This is the personal allowance. Income above it is taxed in bands. For England, Wales and Northern Ireland in 2026/27:

Band	Taxable income	Rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

Each rate only applies to the slice of income inside that band. Moving into the higher rate doesn't mean all your income is taxed at 40%, only the part above £50,270.

Over £100,000. Your personal allowance goes down by £1 for every £2 of income over £100,000, so it disappears completely at £125,140. Between those two figures, the lost allowance and the 40% rate combine, so the tax on that slice of income is effectively higher than 40%. Pension contributions can reduce the income this test uses, so it is worth getting advice if you earn around this level.

Scotland. If you live in Scotland, your income tax is worked out using Scottish rates and bands, which are different and have more bands. Your tax code starts with an S. The personal allowance and National Insurance work the same way across the UK. Check GOV.UK for the current Scottish rates.

Wales. Welsh taxpayers have a tax code starting with C. Welsh rates are set by the Welsh Government and currently match the rates for England and Northern Ireland; check GOV.UK if you live in Wales.

National Insurance

As well as income tax, employees pay Class 1 National Insurance on their earnings. It builds your record for the State Pension and some benefits. For 2026/27, employees pay:

nothing on earnings up to £12,570 a year
8% on earnings between £12,570 and £50,270 a year
2% on earnings above £50,270 a year

National Insurance is worked out on each pay period separately rather than over the whole year, so a one-off bonus month can mean more is taken that month. You stop paying employee National Insurance once you reach State Pension age, although income tax still applies.

Your employer also pays National Insurance on top of your salary. That doesn't come out of your pay, but it is part of what you cost to employ.

Two worked examples

These assume a tax code of 1257L, England, Wales or Northern Ireland rates, 2026/27, and no pension contributions or student loan.

Salary of £30,000

Taxable income: £30,000 minus £12,570 = £17,430
Income tax: 20% of £17,430 = £3,486
National Insurance: 8% of £17,430 = £1,394.40
Take-home pay: about £25,120 a year, or roughly £2,093 a month

Salary of £60,000

Income tax: 20% of £37,700 (the basic rate band) = £7,540, plus 40% of £9,730 (the part above £50,270) = £3,892. Total £11,432
National Insurance: 8% of £37,700 = £3,016, plus 2% of £9,730 = £194.60. Total £3,210.60
Take-home pay: about £45,357 a year, or roughly £3,780 a month

Pension contributions, student loan repayments and other deductions will change these figures, so treat them as a starting point. If you are weighing up a job offer or pay rise, our guide to salary negotiation in the UK explains how to compare offers on take-home pay as well as salary.

Your tax code

Your tax code tells your employer how much tax-free pay to give you before taking income tax. The most common code is 1257L. The number is your personal allowance with the last digit removed (£12,570), and the L means you get the standard tax-free personal allowance.

Other codes you may see:

S or C at the start means Scottish or Welsh income tax rates apply.
BR means all income from this job is taxed at the basic rate, often used for a second job because your allowance is already used by your main one.
0T means no personal allowance is given against this job.
K codes mean you have income or benefits, such as a company car, that are worth more than your allowance, so tax is collected on top.
W1, M1 or X at the end is an emergency code. It is often used when you start a new job without a P45 and means tax is worked out on each payment on its own.

If your code looks wrong, check it in your HMRC online account or the HMRC app. A wrong code is the most common reason for paying too much or too little tax, and HMRC can correct it.

Your payslip, P60 and P45

Payslip. Employers must give employees and workers a payslip on or before each pay day. It shows your gross pay, each deduction (income tax, National Insurance, pension, student loan) and your net pay. If your pay varies with the hours you work, the hours must be shown too. Check each one against your contract.

P60. At the end of each tax year, your employer must give you a P60 by 31 May. It shows your total pay and the tax and National Insurance deducted for the year. Keep it: you may need it to claim a tax refund, apply for a mortgage or check your record.

P45. When you leave a job, your employer gives you a P45, which shows your pay and tax so far in the tax year. Give it to your next employer so they can use the right tax code from the start.

P11D. If you get taxable benefits, such as private medical insurance or a company car, your employer reports them on a P11D after the end of the tax year.

Other deductions from your pay

Workplace pension. Employers must automatically enrol eligible workers into a pension. Your contributions usually come out of your pay with tax relief, either before tax is worked out or with relief added by the pension provider. You can opt out, but you lose your employer's contributions if you do.
Student loan repayments. If you have a student loan, repayments are taken through PAYE once your earnings pass the threshold for your loan plan. You repay 9% of your income above the threshold (6% for a postgraduate loan). Thresholds differ by plan, so check GOV.UK for yours.
Other deductions can include salary sacrifice schemes, union subscriptions or a court order, depending on your situation.

Getting a refund or paying tax you owe

If you have paid too much tax, for example because you were on an emergency code or left a job part-way through the year, HMRC usually works it out after the end of the tax year and sends a refund or adjusts your code. If you have paid too little, HMRC normally collects it through your tax code the following year. Check your personal tax account if something looks wrong.

You may also be able to claim tax relief on some work expenses you pay yourself, such as professional fees or some uniform costs. GOV.UK lists what you can claim and how. If you are married or in a civil partnership and one of you earns less than the personal allowance, Marriage Allowance can let them transfer £1,260 of their allowance to the other, as long as the higher earner pays tax at the basic rate.

When employees need a tax return

Most employees never need to file a Self Assessment tax return, because PAYE handles everything. You may need one if you also have other income, for example:

self-employed or freelance income of more than £1,000 in a tax year
income from renting out property
untaxed income from savings, investments or dividends above your allowances
foreign income

GOV.UK has a tool to check whether you need to send a return. If you are thinking of working for yourself, our guide on how to become self-employed in the UK explains registering with HMRC, deadlines and National Insurance for the self-employed.

Where tax knowledge leads

If this kind of detail interests you, tax and payroll are real career paths. Our accountant salary guide and the accountant career guide explain the routes in and what they pay, and our UK salaries by career report lets you compare typical pay across hundreds of jobs.

This guide is general information, not tax advice. Rates, bands and allowances can change each tax year, so check GOV.UK or speak to a qualified adviser about your own situation.

Compare UK salaries by career

Frequently asked questions

How much can I earn before paying tax in the UK?

Most people have a personal allowance of £12,570 a year in 2026/27, so they pay no income tax on the first £12,570. The allowance shrinks by £1 for every £2 of income over £100,000 and is gone at £125,140.

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

In England, Wales and Northern Ireland, income above the £12,570 personal allowance is taxed at 20% up to £50,270, 40% up to £125,140 and 45% above that. Scotland has its own rates and bands.

What does the tax code 1257L mean?

It means you get the standard personal allowance of £12,570. The number is your tax-free allowance with the last digit removed, and the L shows you are entitled to the standard allowance.

How much National Insurance do employees pay?

In 2026/27 employees pay Class 1 National Insurance of 8% on earnings between £12,570 and £50,270 a year and 2% on earnings above that. It is worked out on each pay period.

Do I need to do a tax return if I am employed?

Usually not, because PAYE collects your tax. You may need one if you have other income, such as self-employed income over £1,000, rental income or untaxed savings or investment income. GOV.UK has a checker.