How Do Pay Rises Affect Tax Codes in the UK

Introduction

A pay rise is always welcome, but it can sometimes lead to questions about your tax code and how much tax you pay. In most cases, your tax code does not change immediately when your salary increases, but your higher income could affect how your personal allowance and tax rates apply throughout the year.

Understanding how HMRC handles tax code updates will help you check your payslip, avoid surprises, and ensure you are paying the correct amount of tax.

What a tax code does

Your tax code tells your employer or pension provider how much tax-free income you are entitled to each year before Income Tax is deducted. For most people in the 2024 25 tax year, the standard tax code is 1257L, which gives a personal allowance of £12,570.

The code is issued by HMRC and reflects your individual circumstances. It may be adjusted for things like company benefits, a second job, or unpaid tax from previous years. Employers use the code through the Pay As You Earn (PAYE) system to calculate tax each time you are paid.

Does a pay rise change your tax code

In most cases, a pay rise does not automatically change your tax code. Your tax code represents your personal allowance, not your pay level. However, a higher salary can affect how much tax you pay in total, as your earnings may move into a higher tax bracket.

The UK has three main Income Tax bands:

Basic rate (20 percent): on earnings between £12,571 and £50,270.

Higher rate (40 percent): on earnings between £50,271 and £125,140.

Additional rate (45 percent): on earnings above £125,140.

If your pay rise takes you into a higher band, you will pay more tax on the portion of your income that exceeds the threshold.

When HMRC might change your tax code after a pay rise

While your personal allowance remains the same, HMRC may update your tax code if:

You receive new taxable benefits such as a company car or medical insurance.

You have more than one job and your total income changes significantly.

You are repaying unpaid tax from a previous year through your tax code.

You start receiving a new pension or benefit that affects your total income.

Employers send payroll information to HMRC in real time, so any major change in your pay could trigger an automatic review of your tax record. HMRC will then issue an updated code if adjustments are needed.

How a pay rise can change your take-home pay

When your salary increases, you will pay tax and National Insurance on the extra amount. For example:

If you were earning £40,000 and received a pay rise to £45,000, you would stay within the basic rate band, paying 20 percent tax on most of your earnings.

If your pay increased from £49,000 to £55,000, the additional £5,000 above £50,270 would be taxed at 40 percent.

Your payslip may show higher deductions, but this reflects your new tax band rather than a change in tax code.

Pay rises and National Insurance

A pay rise can also increase your National Insurance contributions (NICs). Employees currently pay:

8 percent on earnings between £12,570 and £50,270.

2 percent on earnings above £50,270.

As your salary increases, the amount of NIC you pay will rise slightly, reducing your net take-home pay even though your gross salary has gone up.

How to check if your tax code is correct

If you notice an unexpected change in your take-home pay after a pay rise, it is worth checking your tax code. You can find it on your payslip, your P45 or P60, or by logging into your Personal Tax Account on GOV.UK.

Your code will normally look something like 1257L, but it may include letters or prefixes depending on your circumstances, for example:

BR: All income taxed at basic rate.

D0 or D1: All income taxed at higher or additional rate.

K: You owe tax from a previous year or have taxable benefits exceeding your allowance.

If you think your code is wrong, contact HMRC or update your details online.

How to correct your tax code

If your tax code needs updating because of a pay rise or other change, you can:

Log in to your Personal Tax Account on GOV.UK and review your income details.

Use HMRC’s online tool to report a change in income or benefits.

Call HMRC on 0300 200 3300 if you cannot update your details online.

Once HMRC reviews your information, they will send a new tax code to your employer electronically, and any overpaid or underpaid tax will be adjusted through your next payslip.

Backdated adjustments and refunds

If your employer or HMRC updates your tax code partway through the tax year, your payroll system may automatically correct any underpayment or overpayment of tax. This can result in:

A small increase in your take-home pay if you have overpaid tax earlier in the year.

A one-off reduction if you owe additional tax due to the pay rise.

At the end of the tax year, HMRC checks your overall earnings and tax paid. If you have overpaid, they will issue a refund automatically or adjust your code for the next year.

Pay rises and benefits in kind

If your pay rise comes with new benefits in kind, such as a company car, medical insurance, or interest-free loans, these will affect your taxable income. HMRC adds the value of these benefits to your salary when calculating tax.

Your tax code may then be adjusted to account for the value of the benefits. You will receive a P11D form from your employer showing the total taxable value of these benefits.

Common mistakes to avoid

Assuming a pay rise automatically means a new tax code.

Ignoring your payslip and missing tax code changes.

Forgetting to report new benefits or second jobs to HMRC.

Failing to check your tax band if your income crosses a threshold.

Regularly reviewing your tax code helps ensure you pay the correct amount and prevents surprise deductions later.

Conclusion

A pay rise itself does not usually change your tax code, but it can affect how much tax and National Insurance you pay overall. If your salary increase includes new benefits or takes you into a higher tax band, HMRC may issue a new code to reflect the change.

Always check your payslip for updates, keep your income details current with HMRC, and use your Personal Tax Account to monitor your tax code. Doing so ensures you stay compliant and only pay the tax you owe on your new earnings.