UK Tax & Salary FAQ — 2026/27 Tax Year

PAYE (Pay As You Earn) is the system UK employers use to deduct Income Tax and National Insurance from your wages before paying you. It operates cumulatively — meaning HMRC tracks your year-to-date earnings and adjusts each payment to spread your annual tax bill evenly across the year. For example, if you earn £36,000 and are paid monthly, your employer uses your tax code (typically 1257L) to calculate that you should pay roughly £390 in Income Tax per month. If you receive a bonus in one month, PAYE temporarily increases the deduction, but then adjusts downward in following months if you've overpaid. This is why your December payslip sometimes looks different from January — cumulative tax calculations 'catch up' throughout the year.

A tax code tells your employer how much tax-free income you get per year. The standard 2026/27 code is 1257L, which means £12,570 tax-free. The number is your Personal Allowance divided by 10, and the letter indicates your situation (L = standard, M = receiving Marriage Allowance, S = Scottish taxpayer). Real-world example: if your code is changed to 1100L because HMRC is collecting a £1,470 underpayment from last year, your monthly tax-free amount drops from £1,047.50 to £916.67 — costing you an extra £26 per month. Tax code errors are common after changing jobs, and checking your code against your latest P2 notice from HMRC is the fastest way to spot overpayments.

Adjusted Net Income is your total taxable income minus pension contributions (gross amount for relief at source, or the reduction itself for salary sacrifice) and Gift Aid donations (grossed up by 25%). HMRC uses this figure — not your gross salary — for the Personal Allowance taper (above £100,000), HICBC calculations, and Marriage Allowance eligibility. This distinction matters enormously: someone earning £105,000 with £6,000 of salary sacrifice pension contributions has an Adjusted Net Income of £99,000, which means they keep their full £12,570 Personal Allowance and save over £3,000 compared to someone who doesn't contribute to a pension.

Gross pay is your total earnings before any deductions — the number on your employment contract. Net pay (take-home pay) is what actually lands in your bank account after Income Tax, National Insurance, pension contributions, student loan repayments, and any other deductions are removed. The gap can be substantial: on a £40,000 gross salary with a 5% salary sacrifice pension, your net pay is approximately £31,100 — a 22% reduction. On £80,000, the gap widens to roughly 32% due to Higher Rate tax. Always compare job offers on a net basis, not gross — a £5,000 gross pay rise may only add £2,900 to your bank account after deductions.

Between £100,000 and £125,140, your Personal Allowance is tapered away at £1 for every £2 of income above £100,000. This creates an effective marginal rate of 62%: 40% Income Tax + 20% from lost allowance being taxed at 40% + 2% NI. Concrete example: a pay rise from £100,000 to £110,000 costs you £6,200 in extra tax — meaning you keep only £3,800 of a £10,000 raise. The most effective escape route is salary sacrifice pension contributions: contributing £10,000 into your pension reduces your Adjusted Net Income to £100,000, restoring your full £12,570 Personal Allowance and saving approximately £6,000 in tax for a real-cost of roughly £4,000 to your take-home pay. This is the single highest-impact tax planning decision most £100k+ earners can make.

Not automatically, no. Your tax code is not updated in real time based on income changes. HMRC adjusts tax codes based on information reported by your employer at the end of each tax year (P60) or mid-year if you or your employer reports a change. If your income drops significantly — for example, you reduce your hours, stop a benefit-in-kind, or leave a job — your tax code for the new year may reflect the old, higher income until HMRC is notified. This is a common source of overpayment. What to do: if you know your income will be significantly lower in the new tax year, contact HMRC directly (via your Personal Tax Account or by calling 0300 200 3300) before 6 April to request a code update. Tax codes are set by HMRC — your employer cannot change them without a formal HMRC instruction. Conversely, if HMRC issues a new code in April that looks wrong, check it against your P2 coding notice and challenge it if necessary. You can also check and update your tax code details online at gov.uk through your Personal Tax Account.

A K tax code means you have taxable deductions exceeding your tax-free Personal Allowance — usually because of an outstanding tax debt or a taxable benefit-in-kind (like a company car or private medical insurance) that costs more than your allowance. The number indicates the additional amount to be treated as taxable income. K250 means £2,500 of extra taxable income is added to your earnings before tax is calculated. Example: standard Personal Allowance is £12,570. With a K250 code, HMRC effectively treats you as having minus £12,570 + £2,500 = taxable from the first pound, plus an extra £2,500. In practice, this significantly increases your tax deduction each payslip. K codes can arise from: unpaid tax from previous years collected through PAYE, company car benefits, medical insurance provided by your employer, or living accommodation provided by your employer. Important: HMRC caps K code deductions so that no more than 50% of your gross pay can be taken as tax in any single pay period — so you will always take home at least half your pay regardless of the K code size. If you receive a K code unexpectedly, check your P2 coding notice for a breakdown and contact HMRC if anything looks wrong.

Qualifying Earnings are the band of income between £6,240 and £50,270 used to calculate Auto-Enrolment pension contributions. The first £6,240 of your salary is excluded, so actual pension contributions are lower than a simple percentage of your full salary. For example, on a £30,000 salary with a 5% employee contribution: the qualifying earnings are £23,760 (£30,000 minus £6,240), so you'd contribute £1,188 per year — not £1,500. Your employer adds at least 3% (£712.80). Some employers calculate pension on total pay instead of qualifying earnings, which results in higher contributions — if your employer offers this, it's worth taking advantage of, as every extra pound contributed via salary sacrifice saves you both tax and NI.

Salary sacrifice is a contractual arrangement where you agree to a lower gross salary in exchange for your employer making additional pension contributions on your behalf. Because the pension is paid before Income Tax and National Insurance are calculated, you save both. On a £50,000 salary with 5% salary sacrifice, you contribute £2,500 but your take-home pay only drops by £1,550 — the remaining £950 is tax and NI you would have paid on that income. By contrast, relief at source (the other pension method) only gives automatic 20% tax relief; you still pay 8% NI on the full salary, and Higher Rate taxpayers must manually reclaim the extra 20%/25% relief via Self Assessment. In almost every case, salary sacrifice produces a better outcome — with the caveat that it can reduce your 'reference salary' for mortgage applications.

Salary sacrifice saves more in virtually every scenario because it reduces your gross pay before both Income Tax and National Insurance are calculated. Relief at source only provides automatic 20% tax relief — your pension provider claims it back from HMRC — but you still pay NI on the full salary. Worked example at £50,000 with 5% pension: Salary sacrifice saves you £500/year in Income Tax and £200/year in NI vs relief at source. For Higher Rate taxpayers (above £50,270), the gap widens further because relief at source requires you to manually claim the extra 20% tax relief via Self Assessment — something an estimated 1.5 million higher-rate taxpayers forget to do. The main downside of salary sacrifice: your contractual salary is lower, which can affect mortgage affordability assessments and statutory payments like maternity pay. Overall, salary sacrifice remains the recommended default unless you're planning a major mortgage application within 12 months.

National Insurance is a UK tax on earnings that funds the State Pension, NHS, and certain benefits. Employees pay 8% on earnings between £12,570 and £50,270 (the Primary Threshold and Upper Earnings Limit), then 2% on everything above. Employers pay a separate 15% on earnings above £5,000 — this doesn't come from your pay but adds to your employer's cost of employment. For example, an employee on £40,000 pays £2,194 in NI, while their employer pays £5,250 — making the total cost of employment £45,250. NI has quietly become a larger proportion of deductions since 2022 due to threshold freezes while wages have risen, a phenomenon called 'fiscal drag' that pulls more of your income above the NI threshold each year.

Class 2 NI is a flat-rate contribution historically paid by self-employed workers. Since the 2024/25 tax year, it's treated as paid automatically if your profits exceed £6,845 (the Small Profits Threshold) — you no longer pay it directly, but it still counts towards building your State Pension entitlement. Previously, it was £3.45/week. If your profits are below £6,845 but above £6,725, you can choose to pay voluntarily to protect your pension record. This is one of the cheapest ways to build National Insurance qualifying years for your State Pension.

Class 4 NI is charged on self-employed profits and paid via Self Assessment. The rates for 2026/27 are 6% on profits between £12,570 and £50,270, and 2% on profits above £50,270. Unlike employee NI, there's no employer contribution — so the self-employed effectively fund their own social insurance at a slightly lower combined rate. Real example: on £60,000 profit, you'd pay £2,264 in Class 4 NI ((£50,270 - £12,570) × 6% + (£60,000 - £50,270) × 2%). This is a key reason why net take-home is higher for the self-employed at equivalent income levels — but it comes with the trade-off of no employer pension contributions and no sick pay.

The UK has five student loan plans, each with different repayment thresholds and write-off dates. Plans 1, 2, 4, and 5 charge 9% of income above the threshold; Postgraduate charges 6% above £21,000. The thresholds for 2026/27: Plan 1 (pre-2012 England/Wales or NI): £26,900; Plan 2 (post-2012 England/Wales): £29,385; Plan 4 (Scotland): £33,795; Plan 5 (post-2023 England): £25,000. Real example: on a £35,000 salary with Plan 2, you'd repay £505/year (9% of £5,615), which is £42/month. If you also have a Postgraduate loan, both run concurrently — you could be repaying 15% of income above the relevant thresholds. Write-off dates vary: Plan 1 at age 65, Plan 2 after 30 years, Plan 5 after 40 years.

Each plan has a different annual threshold and repayment rate. For 2026/27: Plan 1 (pre-2012): 9% above £26,900. Plan 2 (2012-2023 England/Wales): 9% above £29,385. Plan 4 (Scotland): 9% above £33,795. Plan 5 (post-2023 England): 9% above £25,000. Postgraduate: 6% above £21,000. Monthly worked example on £40,000 salary: Plan 1 takes £98.25/month, Plan 2 takes £79.63/month, Plan 4 takes £46.54/month, Plan 5 takes £112.50/month. If you have both an undergraduate and postgraduate loan, both run concurrently. A common mistake is not checking which plan you're on — HMRC sometimes assigns the wrong plan after a job change, leading to incorrect deductions that must be reclaimed.

Student loan repayments are calculated on your gross pay (before Income Tax and National Insurance), but they are deducted after those taxes are taken. Practically speaking: HMRC calculates your repayment based on your gross earnings above the threshold, then your employer deducts tax, NI, and the student loan repayment from your gross pay — you never get to 'keep' the gross amount and pay the loan yourself. Example: on a £35,000 salary with Plan 2, gross income above the £29,385 threshold is £5,615. Your repayment is 9% of £5,615 = £505/year (£42/month). This is shown as a separate line on your payslip, usually labelled 'Student Loan'. Crucially, the repayment is NOT tax-deductible — it doesn't reduce the amount of Income Tax or NI you pay. It is purely an additional deduction on top of tax and NI. This is why, at £35,000, your effective total deduction rate can feel surprisingly high: you might be losing 20% tax + 8% NI + 1.43% student loan (Plan 2) = nearly 30% of your gross salary before pension.

Self Assessment is HMRC's system for collecting tax on income not handled through PAYE. You must register and file a return if you're self-employed with income over £1,000, need to repay the HICBC, have rental income, earn over £150,000, or have untaxed savings or investment income exceeding certain thresholds. The deadline is 31 January following the end of the tax year (e.g. 31 January 2028 for the 2026/27 year). Late filing triggers an automatic £100 penalty, even if you owe nothing. One frequently overlooked requirement: any employee earning over £100,000 may need to file Self Assessment to correctly taper their Personal Allowance, even if all their income is taxed through PAYE.

Start with your total income, subtract allowable business expenses (travel, equipment, office costs, professional subscriptions) to get your taxable profit. Then apply Income Tax bands and Class 4 NI (6% on profits between £12,570 and £50,270, plus 2% above). Class 2 NI is treated as paid automatically since 2024/25 if profits exceed £6,845. Worked example: freelance developer earning £55,000 with £5,000 in expenses has £50,000 profit. Income Tax: £7,486. Class 4 NI: £2,246. Total deductions: £9,732. Take-home: approximately £40,268 — but remember, unlike PAYE employees, you need to set aside money throughout the year for your January tax bill and make payments on account. Our Self-Employed Calculator handles all of this automatically.

You can deduct any costs incurred 'wholly and exclusively' for business purposes. Common allowable expenses include: office rent and utilities (or the simplified home office flat rate of £6/week), broadband and phone (business percentage), travel and subsistence for business trips, equipment and tools, professional insurance, accountancy fees, marketing costs, and pension contributions. For vehicles, you can use simplified mileage rates (45p/mile for the first 10,000 miles, then 25p). Capital items like laptops or equipment over £1,000 may qualify for the Annual Investment Allowance. The most commonly missed deductions we see are professional body subscriptions, home office costs, and pension contributions — which reduce both your Income Tax and Class 4 NI.

The HICBC is a tax charge that claws back Child Benefit when the higher earner in a household exceeds £60,000. It works at 1% of the full Child Benefit for every £200 above £60,000, reaching full clawback at £80,000. Crucially, it's assessed per individual, not per household — so a couple both earning £59,000 (£118,000 combined) pay nothing, while a single earner on £70,000 loses 50% of their benefit. Real example: with two children, Child Benefit is roughly £2,075/year. At £70,000 income, you'd repay £1,037 via Self Assessment. In Joanna's experience reviewing these cases, many families earning between £60,000 and £100,000 don't realise that increasing pension contributions via salary sacrifice can push their Adjusted Net Income below £60,000, keeping the full benefit.

Marriage Allowance lets a non-taxpaying spouse (or one earning under £12,570) transfer £1,260 of their unused Personal Allowance to a Basic Rate taxpayer partner, saving up to £252/year. It can be backdated four years via HMRC, meaning a lump sum of up to £1,258 if you've been eligible since 2022/23. Important limitation: the receiving partner must be a Basic Rate taxpayer — if they earn over £50,270, they're ineligible. This catches many people out. Also, Marriage Allowance is separate from the Married Couple's Allowance (which only applies if one of you was born before 6 April 1935).

You qualify if: (1) you're married or in a civil partnership, (2) one partner earns below £12,570, and (3) the other partner is a Basic Rate taxpayer (earning between £12,571 and £50,270 in England/Wales/NI, or the equivalent in Scotland). The lower earner applies to transfer £1,260 to their partner. It cannot be split — the full £1,260 must go to one partner. Common scenario: one parent stays home to raise children while the other works full-time earning £35,000. The non-working parent transfers £1,260, reducing the worker's tax bill by £252/year. Claims can be backdated four full tax years, giving a potential lump sum of up to £1,258. Apply online at gov.uk/marriage-allowance — it takes about 10 minutes.

The charge is 1% of Child Benefit for every £200 of income above £60,000, reaching 100% at £80,000. The formula: (Adjusted Net Income - £60,000) ÷ £200, capped at 100%. Worked example: two children = £2,075 annual benefit. At £70,000 income: (£70,000 - £60,000) ÷ £200 = 50 percentage points. Charge = 50% × £2,075 = £1,037.50 repaid via Self Assessment. A strategy Joanna frequently recommends: if your gross salary is £68,000, salary sacrificing £8,000 into your pension drops your Adjusted Net Income to £60,000, wiping out the entire HICBC. That £8,000 pension contribution effectively 'costs' you about £3,840 in reduced take-home pay, but saves you £1,037 in HICBC plus £3,200 in tax — a net gain of roughly £397 plus £8,000 of pension wealth.

Because of the 60% tax trap. Above £100,000, you lose £1 of Personal Allowance for every £2 of extra income. A £6,000 raise from £99,000 to £105,000 breaks down as follows: the first £1,000 (£99k to £100k) is taxed at 42% (40% tax + 2% NI) = you keep £580. The next £5,000 (£100k to £105k) is taxed at 62% (40% tax + 20% from lost allowance + 2% NI) = you keep only £1,900. Total extra take-home: approximately £2,480 from a £6,000 gross raise — an effective rate of 59%. By contrast, redirecting £5,000 of that raise into salary sacrifice pension contributions would save you roughly £3,100 in tax and NI while building £5,000 of pension wealth. This is why financial advisers often recommend pension contributions as the priority for anyone crossing the £100k threshold.