How PAYE Works in 2025/26: A Plain-English Guide to UK Tax Codes

Pay As You Earn (PAYE) is the system HMRC uses to collect income tax from employees as they earn, rather than asking you to pay a lump sum at the end of the year. Every payday your employer deducts tax based on a tax code HMRC has issued for you, and forwards it to HMRC on your behalf.

Your tax code

A tax code looks like 1257L. The number is your tax-free Personal Allowance divided by ten — so 1257L means £12,570 tax-free for the year. The letter signals the rules: L is the standard code, M and N are used by people who have transferred part of their allowance to or from a spouse under the Marriage Allowance, K means you have deductions worth more than your allowance (so extra tax is collected each pay period), and BR / D0 / D1 mean basic rate / higher rate / additional rate is applied to all of your earnings (typically a second job).

The 2025/26 income tax bands

For employees in England, Wales, and Northern Ireland: 0% on earnings up to £12,570 (Personal Allowance), 20% on £12,571 to £50,270 (basic rate), 40% on £50,271 to £125,140 (higher rate), and 45% above £125,140 (additional rate). The Personal Allowance reduces by £1 for every £2 you earn above £100,000 — meaning anyone earning £125,140 or more has no Personal Allowance at all and pays 40% from the first pound. This is the so-called £100k tax trap.

Scottish taxpayers

Scotland sets its own rates and bands. For 2025/26 the Scottish bands are: starter rate 19% on £12,571–£14,876, basic rate 20% on £14,877–£26,561, intermediate 21% on £26,562–£43,662, higher 42% on £43,663–£75,000, advanced 45% on £75,001–£125,140, and top rate 48% above £125,140. Scottish status is determined by where you live, not where you work.

How PAYE adapts in real time

Each pay period your tax is calculated cumulatively across the tax year — so if you earned more than expected last month, this month you might see slightly more tax to balance it out. A tax-year-to-date calculation (rather than period-by-period) is what makes PAYE accurate without you having to do any maths. If your code is wrong (which happens often after job changes), HMRC will issue a P800 reconciliation after the year ends and either rebate or collect.

Where this matters on your payslip

Your payslip must show, by law, the gross pay, every variable deduction (PAYE, National Insurance), every fixed deduction (pension), and the net pay. The payslipmaker.uk Payslip Generator auto-calculates all of this using 2025/26 rates and lets you toggle Scottish status with one click.