Take-Home Pay: PAYE, National Insurance, and Pension
Payslips look busy — but they follow a simple order: pre-tax deductions (like pension via salary sacrifice), PAYE income tax, National Insurance (NI), then student loan and other post-tax items. Here’s how to read yours.
1) Gross vs Taxable Pay
Gross pay is your contractual pay before deductions. Taxable pay may be lower if you use salary sacrifice for pension or benefits — these reduce both income tax and NI because they reduce your gross for tax purposes.
- Pre-tax deductions: Salary-sacrifice pension, cycle-to-work, some childcare.
- Post-tax deductions: Charity via Gift Aid, union subs, normal (non-sacrifice) employee pension.
2) PAYE Income Tax Bands & Codes
PAYE spreads your annual tax-free allowance and bands across the year. Your tax code controls how much of the Personal Allowance you receive each pay period.
Common codes:
- 1257L — standard Personal Allowance (£12,570 for typical earners)
- BR — “Basic Rate” on all income at 20% (often on a second job)
- D0 — all income at 40% (higher-rate, usually second job)
- D1 — all income at 45% (additional-rate, second job)
- Emergency/W1M1 — treats pay in isolation this period; no year-to-date smoothing
If your code looks wrong (e.g., BR on your main job), contact HMRC or update via the app — it can materially change take-home.
3) National Insurance (NI)
Employees pay Class 1 NI on earnings above the primary threshold. NI bands differ from income-tax bands and are calculated per pay period. Salary sacrifice reduces NI as well as tax because it reduces NI-able pay.
4) Workplace Pensions
Most employees are auto-enrolled. Two common setups:
- Salary sacrifice (recommended by many employers): Your gross pay is reduced and the employer pays the pension amount. You save income tax and NI; employer often shares their NI saving too.
- Net pay or relief-at-source: Contributions are taken from pay either before tax (net-pay) or after tax with top-ups (relief-at-source). NI treatment differs.
5) Student Loan Deductions
Student loan repayments are a % of earnings above a plan-specific threshold. Your payslip shows the plan type (1/2/4/5) and/or Postgraduate Loan (PGL).
| Plan | Typical Deduction | Notes |
|---|---|---|
| Plan 1 | 9% above threshold | Older undergrad loans (mainly pre-2012) |
| Plan 2 | 9% above threshold | Most English/Welsh undergrad since 2012 |
| Plan 4 | 9% above threshold | Scottish loans |
| Plan 5 | 9% above threshold | Newer English loans (from 2023/24) |
| Postgraduate (PG) | 6% above threshold | Can be taken alongside Plan 1/2/4/5 |
Your employer uses HMRC instructions to apply the right plan(s). If you see the wrong plan, contact the Student Loans Company and HMRC to correct it.
6) Common Payslip Lines
- Gross pay: Salary before deductions.
- Taxable/NI-able pay: After pre-tax deductions (e.g., salary-sacrifice pension).
- PAYE tax: Year-to-date and this period.
- NI: This period’s employee NI.
- Pension: Employee and employer contributions.
- Student loan: This period’s deduction (if applicable).
- Net pay: What lands in your bank.
7) Quick Example (Monthly Paid)
£40,000 salary, code 1257L, no other deductions, pension via salary sacrifice 5%:
- Gross: £3,333.33 → Sacrifice (5%): £166.67 → Taxable pay ≈ £3,166.66
- PAYE & NI computed on taxable/NI-able pay (not the sacrificed part)
- Student loan: only if above threshold for your plan
- Net pay = Taxable pay − PAYE − NI − (post-tax deductions, if any)
Exact figures depend on thresholds and your benefits. Use the Take-Home Pay Calculator for a precise estimate.
8) Fixing Surprises on Your Payslip
- Check your tax code — wrong code = wrong take-home.
- Confirm whether pension is salary sacrifice or not (affects NI).
- Verify student loan plan and PG flag are correct.
- Compare year-to-date figures to spot anomalies.
9) Key Takeaways
- Order matters: pre-tax deductions → PAYE → NI → student loan.
- Tax codes (1257L, BR, D0, D1) determine how your allowances/bands are applied.
- Salary sacrifice usually boosts take-home vs normal employee pension.
- Use CalcFlow’s Take-Home Pay Calculator for tailored numbers.