How Income Tax works for employees

The short answer

Income Tax applies by tax year, from 6 April to 5 April. Taxable income above available allowances is divided into bands. HMRC tells an employer which tax code to use, and payroll applies that code through PAYE to deduct Income Tax from pay during the year.

For 2026 to 2027, the standard Personal Allowance is £12,570. It reduces by £1 for every £2 of adjusted net income above £100,000 and is nil at £125,140.

England, Wales and Northern Ireland

With the standard allowance and no other adjustment, total employment income is commonly described as:

• up to £12,570: 0% Personal Allowance;
• £12,571 to £50,270: 20%;
• £50,271 to £125,140: 40%; and
• above £125,140: 45%.

The bands apply progressively, not one rate to all income. Wales currently uses the same headline employment bands. Scottish non-savings, non-dividend income uses 19%, 20%, 21%, 42%, 45% and 48% bands for 2026 to 2027.

Scotland

Scottish employment income uses starter, basic, intermediate, higher, advanced and top rates. A Scottish tax code normally begins S. Savings and dividend treatment does not simply copy Scottish earned-income bands.

Use HMRC’s current table rather than an England-only calculator.

What PAYE does

HMRC issues a code reflecting allowance, benefits, other income and adjustments. Payroll combines the code with taxable pay and pay frequency. PAYE normally uses pay and tax to date; W1, M1, X or NONCUM treatment works from the current pay period only.

PAYE is a collection method, not a guarantee the final annual amount is correct. Starting or leaving work, bonuses, benefits and several jobs can change the result.

National Insurance is separate

Employee Class 1 National Insurance has its own thresholds and rates and is separate from Income Tax. Other payslip deductions are not Income Tax either, so reconcile each labelled amount on its own terms.

Worked progressive example

An employee in England has total employment income of £32,570 and the full £12,570 Personal Allowance. On these simplified facts, £20,000 is taxable at 20%, producing £4,000 Income Tax.

This deliberately ignores National Insurance, pension method, benefits, earlier pay and code differences.

Check the result

Compare the payslip’s gross pay, taxable pay, code, period and year-to-date tax with HMRC’s current-year service. That service shows the code, Personal Allowance, tax already paid and HMRC’s estimate for the rest of the year. Payroll should apply HMRC’s code; underlying record errors are corrected with HMRC.

Common mistakes

• Applying the highest rate to all income.
• Assuming everyone receives £12,570.
• Using England’s bands for Scottish pay.
• Confusing tax with National Insurance.
• Treating one payslip as the final annual result.
• Ignoring a second job or benefit.

What to do next

1. Identify residence/rate regime.
2. Check allowance and code.
3. Reconcile taxable pay.
4. Apply bands progressively.
5. Compare year-to-date tax with HMRC.
6. Correct source information if needed.