How Do Payslips and Tax Work

What is a payslip?

A payslip shows how much you have earned and what has been taken from your pay before you receive it.

If you are an employee or worker, your employer must give you a payslip on or before payday. This can be provided on paper or electronically.

Your payslip will usually show:

  • your gross pay
  • deductions from your pay
  • your net pay
  • the pay period
  • your tax code
  • your National Insurance contributions
  • other deductions, where applicable

If your pay changes depending on the number of hours you work, your payslip should also show the hours worked.

Gross pay and net pay

Two terms you are likely to see are gross pay and net pay.

Gross pay is the amount you earn before deductions are taken.

Net pay is the amount you receive after deductions have been taken.

For example, if your gross pay is £1,500 and £200 is deducted, your net pay would be £1,300.

Your net pay is the amount that normally reaches your bank account.

What is Income Tax?

Income Tax is a tax on certain types of income, including earnings from employment.

If you are employed, your employer will normally take Income Tax from your pay before you receive it. This system is called PAYE, which stands for Pay As You Earn.

The amount of Income Tax you pay depends on your income and circumstances. You do not automatically pay Income Tax on every pound you earn.

Your employer uses information from HM Revenue and Customs (HMRC), including your tax code, to work out how much tax to deduct.

What is a tax code?

Your tax code helps your employer work out how much Income Tax to take from your pay.

You can usually find your tax code on your payslip. HMRC can also provide information about your tax code through your online account or the HMRC app.

Your tax code may change if you start a new job, change jobs or your circumstances change.

If you think your tax code is wrong, you can check it against the information HMRC holds and speak to your employer or HMRC if necessary.

What is National Insurance?

National Insurance (NI) is another deduction that may be taken from your pay if you are employed.

National Insurance contributions help fund certain state benefits and services.

The amount you pay depends on your circumstances and how much you earn. If you are an employee, your employer normally deducts your National Insurance contributions from your pay and passes them to HMRC.

Other deductions

Not every deduction on your payslip is tax or National Insurance.

Depending on your circumstances, you might see deductions for:

  • workplace pension contributions
  • student loan repayments
  • trade union subscriptions
  • other deductions that apply to your employment

If you see a deduction you do not recognise, ask your employer or payroll team what it is for.

Workplace pensions

You may see a deduction for a workplace pension on your payslip.

If you are eligible, your employer may automatically enrol you into a workplace pension.

If you are enrolled, part of your pay may be deducted as your pension contribution. Your employer will normally also contribute to the pension.

The amount you receive in your bank account can therefore be lower than it would be without the pension deduction.

You should check your payslip and pension information so you understand what is being deducted and what your employer is contributing.

Student loan repayments

If you have a student loan, repayments may be deducted directly from your pay when you meet the relevant repayment requirements.

The amount you repay depends on factors including your income and the type of student loan repayment plan you have.

If you are unsure which repayment plan you are on or whether deductions are correct, check your student finance information or GOV.UK guidance.

What is a P45 and P60?

You may come across a P45 and P60 when starting or leaving a job.

A P45 is normally given to you when you leave a job. It contains information about your pay and tax during that employment. You may need to give information from your P45 to a new employer.

A P60 shows your total pay and tax for the tax year. Your employer should give you a P60 if you are employed by them at the end of the tax year.

Keep these documents somewhere safe because they can be useful when checking your income and tax.

Checking your payslip

It is a good idea to check your payslip each time you are paid.

Check:

  • Is your name correct?
  • Is the pay period correct?
  • Is your gross pay what you expected?
  • Are the hours shown correctly, if applicable?
  • Is your tax code correct?
  • Are your National Insurance deductions expected?
  • Are your pension or student loan deductions correct, if applicable?
  • Are there any deductions you do not recognise?
  • Is your net pay what you expected?

You do not need to understand every part of your payslip immediately. If something does not make sense, you can ask your employer or payroll team to explain it.

What if your payslip is wrong?

If you think your payslip is incorrect, raise it with your employer, manager or payroll team as soon as possible.

For example, you could say:

“I have checked my payslip and I think the number of hours paid may be incorrect. Could you please check this for me?”

Or:

“I have noticed a deduction on my payslip that I do not recognise. Could you explain what this is for?”

It is usually best to raise the issue informally first so your employer has an opportunity to check and correct any mistake.

What if you have not received a payslip?

If you are an employee or worker and have not received your payslip, speak to your employer or payroll team.

Your employer must provide a payslip on or before payday.

If the problem is not resolved, Acas provides further information about your options.

Further information