Understanding Your Payslip: Tax Codes, NI, and Deductions Explained

Your payslip can look confusing with its columns of numbers and codes. But understanding what each deduction means helps you check you are being paid correctly — and spot mistakes. Here is a plain-English guide.

Gross Pay vs Net Pay

• Gross pay: your total earnings before any deductions
• Net pay: what actually lands in your bank account
• The difference is tax, National Insurance, pension, and any other deductions

Your Tax Code

Your tax code tells your employer how much tax-free pay you get. The most common code is 1257L, which means you can earn £12,570 per year tax-free (the personal allowance).

If your code looks different:

• BR — all income taxed at basic rate (20%). Common if you have two jobs and your personal allowance is used on the other one
• 0T — no personal allowance. Usually means HMRC does not have enough information about you. Call them
• W1 or M1 — emergency tax code. Means HMRC is working out your correct code. It usually corrects itself, but chase them if it does not within 4-6 weeks

Income Tax

Deducted automatically through PAYE (Pay As You Earn):

• Personal allowance: first £12,570 — no tax
• Basic rate: £12,571 to £50,270 — 20% tax
• Higher rate: £50,271 to £125,140 — 40% tax

On a typical warehouse wage of £25,000, you pay 20% on £12,430 (the amount above the personal allowance) = roughly £2,486 per year or £207 per month.

National Insurance

A separate deduction that funds the NHS and state pension:

• You pay 8% on earnings between £12,570 and £50,270 per year
• Your employer also pays 13.8% on top — this does not appear on your payslip
• On £25,000, your NI is roughly £994 per year or £83 per month

Pension

Under auto-enrolment, you contribute a minimum of 5% of qualifying earnings and your employer contributes 3%. You can opt out (within the first month) but you lose the employer contribution. For most people, it is worth keeping.

Student Loan

If you have a student loan, repayments are deducted automatically:

• Plan 1 (started before 2012): 9% on earnings above £22,015
• Plan 2 (started from 2012): 9% on earnings above £27,295
• Plan 5 (started from 2023): 9% on earnings above £25,000

Umbrella Companies

Some agencies pay through an umbrella company. This means the umbrella is your legal employer, not the agency. Your payslip will show deductions for employer NI and the umbrella margin before your gross pay. This looks like you are being taxed more, but the total cost to the client is the same — it is just presented differently. If you do not understand your umbrella payslip, ask your agency to walk you through it.