FEATURED ARTICLE
The UK Payroll Handbook: How Your Salary Really Works (With Formulas & Examples)
Giuliano Fabbri
May 21, 2025 •2 min read
TABLE OF CONTENTS
Your Paycheck Decoded: Gross vs. Net Pay
The PAYE System: How Taxes Are Collected
National Insurance Explained
Statutory Payments: Your Rights at Work
Key Payroll Forms
Payroll Lingo Cheat Sheet
Why This All Matters: Take Control of Your Pay
Ever stared at your payslip wondering how £3,000 becomes £2,200? Or why your colleague's "£50k salary" takes home less than you expected? Let's demystify UK payroll with plain English explanations, real calculations and everything you need to check you're being paid correctly.
Your Paycheck Decoded: Gross vs. Net Pay
Gross Pay = Your Total Earnings
This is the big number in your contract before any deductions. It includes:
- Base salary
- Bonuses
- Overtime
- Commission
Example:
£36,000 annual salary = £3,000 gross monthly pay
Net Pay = What Actually Hits Your Bank Account
The magic (depressing?) formula for Net Pay:
Gross Pay
- Income Tax
- National Insurance
- Pension Contributions
- Student Loans (if applicable)
Real Calculation for £3,000 Gross (2024/25 Rates)
(Using tax code 1257L and 5% pension)
| Deduction | How It's Calculated | Amount |
|---|---|---|
| Income Tax | (£3,000 - £1,048 tax-free) × 20% | £390.40 |
| National Insurance | (£3,000 - £1,048) × 12% | £234.24 |
| Pension | £3,000 × 5% | £150 |
| Net Pay | £3,000 - £390.40 - £234.24 - £150 | £2,225.36 |
Note: This assumes no student loans. Plan 2 loans would deduct 9% on earnings over £27,295/year.
The PAYE System: How Taxes Are Collected
PAYE (Pay As You Earn) automatically deducts:
- Income Tax (20%/40%/45% bands)
- National Insurance (12%/2% rates)
- Student Loans (Plan 1: 9% over £22,015; Plan 2: 9% over £27,295)
Pro Tip: Check your tax code (e.g., 1257L). Wrong codes mean wrong deductions!
National Insurance Explained
NI funds state benefits like pensions and healthcare. For employees:
| Earnings (2024/25) | NI Rate |
|---|---|
| £12,570–£50,270 | 12% |
| Above £50,270 | 2% |
Example for £4,000/month (£48k/year):
- £4,000 - £1,048 (monthly threshold) = £2,952
- £2,952 × 12% = £354.24/month NI
Statutory Payments: Your Rights at Work
A. Sick Pay (SSP)
- £116.75/week after 4+ sick days
- Only paid if you earn ≥£123/week
B. Maternity Pay (SMP)
- First 6 weeks: 90% of average weekly pay
- Next 33 weeks: £184.03/week (or 90% if lower)
Example Calculation:
£600 average weekly pay
- Weeks 1-6: £600 × 90% = £540/week
- Weeks 7-39: £184.03/week
- Total: (£540 × 6) + (£184.03 × 33) = £9,312.99
(Similar rules apply for paternity/adoption pay)
Key Payroll Forms
| Form | Purpose | When You Get It |
|---|---|---|
| P45 | Shows tax paid when leaving a job | When you resign |
| P60 | Annual tax summary | By 31 May each year |
| P11D | Reports benefits (company cars/healthcare) | By 6 July after tax year |
Payroll Lingo Cheat Sheet
| Term | Meaning | Why It Matters |
|---|---|---|
| BACS | Bank transfer system for salaries | Payment delays? Check BACS dates |
| Attachment of Earnings | Court-ordered wage deductions | For child support/debts |
| YTD (Year-to-Date) | Totals since April | Track tax/NI paid |
Why This All Matters: Take Control of Your Pay
Your payslip isn’t just numbers - it’s your financial wellbeing. Understanding how payroll works means:
- For Employees: Catch costly mistakes—like wrong tax codes (which could cost you thousands) or missing pension contributions.
- For Employers: Stay compliant and avoid HMRC penalties for late filings or incorrect deductions.
- For Freelancers & Gig Workers: Plan ahead if you transition to PAYE—no nasty tax surprises.
Try It Now
- Grab your latest payslip
- Run the numbers using our formulas
- Spot a mismatch? Contact HR or HMRC ASAP
Knowledge isn’t just power - it’s money in your pocket.
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