What is PAYE and how does it work?
Pay As You Earn (PAYE) is the UK system where employers deduct income tax and National Insurance Contributions (NICs) from employees' wages each pay period before paying them, then remit the deductions to HMRC monthly. Employees receive a tax code (e.g. 1257L) that tells the employer how much personal allowance to apply.
What are the UK income tax rates for 2024/25?
Personal Allowance: £12,570 (0%). Basic rate: 20% on £12,571–£50,270. Higher rate: 40% on £50,271–£125,140. Additional rate: 45% above £125,140. Between £100,000–£125,140, the personal allowance tapers away at £1 per £2 earned, creating an effective 60% marginal rate — one of the UK tax system's biggest traps.
What are the National Insurance rates for 2024/25?
Employee NICs 2024/25: 8% on weekly earnings between £242–£967 (£12,570–£50,270 annual). 2% on earnings above £967/week. The 2% rate removed the £50,270 upper earnings limit effectively from January 2024. Employer NICs remain at 13.8% on earnings above £175/week. Self-employed Class 4 NICs are 6% + 2%.
How do pension contributions affect PAYE take-home pay?
Workplace pension contributions (auto-enrolment minimum: 5% employee + 3% employer = 8% total) are deducted before tax on most workplace schemes, reducing taxable income. A basic rate taxpayer contributing £100 to pension only loses £80 take-home. Higher rate taxpayers save 40p in tax per £1 contributed.
What is a tax code and what does 1257L mean?
A tax code tells your employer how much of your income is tax-free. The number (1257) × 10 = £12,570 personal allowance. The letter L means you qualify for the standard personal allowance. BR means basic rate on all income (no personal allowance — used for second jobs). K codes mean you have a negative allowance (e.g. for company benefits).