How do you work out your tax if you are an employee? 

This is a freeview guide. 

In this part of our Starting Work guides we look at:

How are employees taxed?

  • When you are an employee, your employer or the person paying you, must deduct Pay-As-You-Earn (PAYE) Income Tax and National Insurance Contributions (NICs) from your wages before they pay you.
  • This means that you are taxed at source and you receive net taxed wages.
  • Pension contributions may also be deducted under Auto-enrolment

Nearly every UK worker starts the payroll year with a tax-free personal allowance.

  • When you are an employee, this allowance is notified to your employer as a PAYE coding.
  • Your employer can pay up to the amount of your PAYE code (your personal allowance) tax-free.
  • Your tax-free pay is worked out depending on how often you are paid, this might be weekly or monthly.

For the 2024-25 tax year (tax years run 6 April to 5 April), the basic PAYE tax code is set at 1257L.

  • This gives an employee a personal allowance of £12,570 for the year.
  • This is also called the emergency code when it is operated on a non-cumulative basis.

Tax codes have different suffixes to show different things, such as whether you are a Scottish taxpayer, non-resident or on an emergency code, see What is the 2024/25 PAYE tax code? 

When you start work, if you do not have a P45 from previous employment, your employer will ask you to complete a Starter form and they can then use the information you provide to set your PAYE code for that employment.

Basic example

Freya has one job and earns £15,000 per year. She is paid monthly. Her gross monthly pay is £1,250.

She is entitled to a full personal allowance of £12,570.

  • Her monthly tax-free pay is £1,047.50 (£12,570/12 months).
  • Her monthly taxable pay is £202.50 (£1,250.00 - £1,047.50).
  • She is taxed at 20% as she is a Basic rate taxpayer. Her tax comes to £40.50 per month.

Her National Insurance Contributions 'NICs' are calculated separately.

  • The 2024-25 NICs primary threshold is £242 per week (£12,570 per year or £1,048 per month).
  • She pays NICs of 8% on earnings above this threshold.
  • Her NICable earnings are £202 per month (gross pay of £1,250 less NICs monthly threshold of £1,048).
  • Her NICs are payable are £16.16 per month.

Her monthly net pay is: 

  • £1,193.34 (£1,250 - £40.50 - £16.16).

If Freya took a second job, her tax-free PAYE code would be allocated to just one employment based on her earnings. She would then expect that her second job would deduct tax at 20%. For NICs, the limit applies to each job. If she earns less than £242 per week in her second job there are no further NICs to pay. If she earns more than £242 per week in her second job she will have NICs calculated as above.

For high earners with multiple jobs, there are limits to the total amount of NICs payable. See National Insurance: what's the maximum payable?

Next guide in this series

  • How to calculate tax if you are self-employed
    When you are self-employed you have to account for and pay your own tax and National Insurance Contributions (NICs) to HM Revenue & Customs.
  • How & when to register for tax
  • How you are taxed, how your taxes are paid.
  • What are your employment rights and benefits?
  • How do you work out what you should be paid and the cost to the engager?
  • What expenses can you claim when you are self-employed?
  • What expenses can you claim when you are an employee?
  • Pros v cons: is it worth being self-employed?
  • 'Starting in business' checklist

Useful guides on this topic

Starting work: Self-employed or employed: what's the difference?
If you are finding work what is the difference between being employed or self-employed?

Special rules for different types of worker
Starting work, what kind of worker are you? What are the special rules for certain types of workers?

Agency or Umbrellas
If you obtain contract work via an employment agency you could find yourself accidentally caught up in an illegal tax avoidance scheme. If you are not a tax expert you might have little idea how agencies should be accounting for tax and National Insurance on their payments to you. HMRC has now created a basic tool to help you detect whether you are in an illegal scheme. 

Squirrel ad

Are you enjoying our content? 

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register now to receive our FREE weekly SME Tax News update