How to Work Out Tax and National Insurance Deductions

Learn how to work out tax and National Insurance deductions in the UK using PAYE rates and thresholds for accurate take-home pay.

Whether you are an employee reviewing your payslip or a business owner running payroll, understanding how tax and National Insurance deductions work is essential for managing money and ensuring compliance. UK tax deductions for most employees are processed through the Pay As You Earn (PAYE) system, which calculates Income Tax and National Insurance directly from your salary.

While software does most of the heavy lifting, knowing how the figures are worked out gives you confidence that you are paying the right amount and helps when planning budgets or completing tax returns.

This article explains how to work out tax and National Insurance deductions step by step, using current thresholds and rates. It covers both employed and self employed calculations, with examples and tips to avoid common mistakes.

Understanding the Key Components

Before calculating deductions, it's important to understand the main types of contributions taken from income in the UK:

  • Income Tax: Charged on taxable earnings above the personal allowance

  • Employee National Insurance (Class 1): Paid by employees on earnings above a certain threshold

  • Employer National Insurance: Paid separately by employers, not deducted from take-home pay

  • Student Loan Repayments: If applicable, based on income thresholds and loan plans

  • Pension Contributions: May reduce gross taxable income, depending on scheme setup

The calculation begins with your gross pay, then applies each deduction in turn to arrive at your net (take-home) pay.

Step 1: Identify Gross Pay and Tax Code

Start with your gross monthly, weekly or annual salary. Your tax code tells your employer how much tax-free income you are entitled to each year. The standard tax code for 2024/25 is 1257L, which gives most employees a £12,570 personal allowance.

This means you do not pay Income Tax on the first £12,570 of your income in the tax year.

If your tax code is different, your allowance may be adjusted to reflect additional income, benefits, or previous underpayments.

Step 2: Calculate Income Tax

Income Tax is applied to taxable income after the personal allowance. The current bands for England, Wales and Northern Ireland (2024/25) are:

  • 20% on income between £12,571 and £50,270 (basic rate)

  • 40% on income between £50,271 and £125,140 (higher rate)

  • 45% on income above £125,140 (additional rate)

Note that the personal allowance tapers off for income over £100,000, reducing by £1 for every £2 above that amount.

Example: Annual salary of £35,000

  • Personal allowance: £12,570

  • Taxable income: £22,430

  • Tax at 20%: £4,486

To calculate monthly tax, divide by 12:

  • £4,486 ÷ 12 = £373.83 Income Tax per month

Tax codes affect this calculation, and adjustments may be made for previous underpayments or other income.

Step 3: Calculate National Insurance

National Insurance for employees (Class 1) is calculated separately from tax and begins at a lower threshold. For the 2024/25 tax year:

  • You do not pay National Insurance on the first £12,570 per year (Primary Threshold)

  • You pay 8% on earnings between £12,571 and £50,270

  • You pay 2% on earnings above £50,270

Example: Annual salary of £35,000

  • NI threshold: £12,570

  • NI earnings: £22,430

  • NI at 8%: £1,794.40 annually, or about £149.53 monthly

Step 4: Consider Student Loan Deductions

If you have a student loan, deductions depend on your repayment plan. In 2024/25:

  • Plan 1: 9% on earnings above £24,990

  • Plan 2: 9% on earnings above £27,295

  • Plan 4: 9% on earnings above £27,660

  • Postgraduate Loan: 6% on earnings above £21,000

Example: Earning £35,000 on Plan 2

  • Threshold: £27,295

  • Earnings above threshold: £7,705

  • Repayment: £693.45 annually, or £57.79 monthly

Employers automatically deduct student loan repayments through PAYE and include them on your payslip.

Step 5: Account for Pension Contributions

If you are enrolled in a workplace pension, contributions typically range from 5% to 8% of your salary. The way this is deducted affects your tax:

  • Net pay arrangement: Contributions are taken before tax is calculated

  • Relief at source: Contributions are made after tax, with basic rate tax relief added later

For salary sacrifice schemes, contributions reduce your gross salary before tax and National Insurance, offering additional savings.

Example: Earning £35,000 with 5% contribution via net pay

  • 5% of £35,000 = £1,750 per year

  • Taxable pay becomes £33,250

This reduces your Income Tax and NI liability.

Step 6: Calculate Net Pay

Start with gross pay, then subtract:

  • Income Tax

  • National Insurance

  • Pension contributions

  • Student loan (if applicable)

Example: Gross annual pay: £35,000

  • Income Tax: £4,486

  • National Insurance: £1,794.40

  • Pension (5%): £1,750

  • Student loan (Plan 2): £693.45

  • Total deductions: £8,723.85

  • Net annual pay: £26,276.15

  • Net monthly pay: approx. £2,189.68

This gives you a clear picture of take-home income after statutory deductions.

Self Employed Deductions

If you are self employed, you pay:

  • Income Tax on profits above £12,570

  • Class 2 National Insurance if profits exceed £6,725 (£3.45 per week)

  • Class 4 National Insurance at 6% on profits between £12,570 and £50,270, and 2% above that

You work out these figures when completing your Self Assessment return. Unlike employees, self employed people must budget for these liabilities and pay them directly to HMRC, usually in two instalments known as “payments on account.”

Tips to Stay Accurate

  • Use official tax calculators to check figures if your pay fluctuates

  • Always refer to the current year’s thresholds, as they change each April

  • Double-check your tax code if deductions look wrong

  • Keep a record of cumulative earnings and tax paid during the year

  • For directors, salary and dividends require separate calculations

If in doubt, seek advice from a payroll expert or accountant.

Conclusion

Working out tax and National Insurance deductions in the UK may seem complex, but it becomes manageable once you break it down step by step. Start with gross income, apply the correct allowances and thresholds, then calculate each deduction in order.

For employees, PAYE handles most of the work behind the scenes, but understanding how the numbers are calculated puts you in control of your finances. For self employed individuals, careful budgeting and accurate record keeping are essential to stay on top of tax responsibilities.

Whether you are running payroll or checking your own payslip, knowing how to work out deductions helps you plan ahead, avoid surprises, and manage your earnings with confidence.