wellquite.org/tax

Tax! (UK employment variety)

Are you looking at your payslips wondering how any of those numbers are arrived at? Why they sometimes change from month to month? Why on earth they don't show their working? I was.

There are plenty of online salary take-home pay calculators, but they only show figures for the whole year. They don't allow you to put in your payslips from the start of the tax year and tell you what your next one will be. So I wrote this.

NB: Right now, this will only work if your Tax Code ends with an L, and if you're in National Insurance Contributions (NIC) Letter A. In the fullness of time, I might flesh this out further to cope with more complications. Help is welcome!

The TL;DR is:

• Create some Payslips. Payslips must start from the beginning of a tax year (e.g. April 2025) and have no gaps. The zero value is fine for months where you had no income. If you change job within a month, you may have several payslips for the same month. That's ok to put in your list of Payslips: it's fine to repeat a month, so long as it's all in order.
• Call Complete() on them
• Print out the result

For payslips from the past, you can provide the numbers from your actual payslips. But for all payslips, any missing values will be calculated.

I could find no good resources on how PAYE actually works. There seems to be nothing I could find on gov.uk or HMRC's websites. It's all very frustrating. The following is my understanding of how it all works. It creates numbers that match my own payslips fairly closely.

What do you pay income tax on?

The short version is salary - employee pension contributions - personal allowance. What ever is left over is what you pay income tax on. But, income tax and personal allowance, via PAYE (which stands for Pay As You Earn) is all calculated on Year-to-date (YTD) figures (PAYE - the clue's in the name).

So what you actually do is this:

• Add up your total income from the start of this tax year, i.e. year-to-date (YTD).
• Subtract from that all your pension contributions, YTD.
• Also subtract your personal allowance, YTD.
• Figure out how much tax you should have paid on this remaining figure, YTD (more on this later).
• Subtract from this, the amount of tax you've already paid this year. This final number is the amount of tax to pay this month.

What's a personal allowance?

It's an amount of money you're allowed to earn on which you pay no income tax at all. The very rough version, is if your Tax Code ends with an L (which I think is by far the most common), remove the L, and add a 0. The precise calculation is a bit more complex, involving integer division into 500s, and adding 9s in various places. The code in this library does it as correctly as I can figure out. The default Tax Code is 1257L. This means you're allowed to earn roughly £12570 per year (the precise figure is £12579) and pay no income tax at all on that. (Note that HMRC may actually set your personal allowance to some other figure that seems to bear no relation whatsoever to either the rough or precise methods for calculating personal allowance.)

But! Personal allowance is accrued 1/12th per month. So if your tax code is the default 1257L, then you get personal allowance of £1048.25 per month. It also rolls over: if you earn less than your monthly personal allowance in a month (e.g. less than £1048.25) then any amount left over rolls into the next month, where it can be used.

This means that if you have a period of time in a year when you're unemployed, then your personal allowance will build up. This is why when you start earning again, it can take a couple of months for your income tax to stabilise - it'll start off low because you're using up that personal allowance that's built up.

This also means that if you are unemployed (or not using up your personal allowance) as you move from one tax year to another (e.g. let's say you're unemployed in February and March) then you will have over-paid tax and you'll be able to get a refund: essentially in those months you accrued personal allowance but were unable to use it.

Income Tax YTD

PAYE does personal allowance and income tax all based on YTD figures. But it also scales all the tax bands YTD too.

Here are the tax bands for tax year 2024/25. "Taxable income" is salary - pension - personal allowance, and these figures are for the whole year.

Taxable income	Tax rate	Band name
£0 - £37,700	20%	Basic rate
£37,701 - £125,140	40%	Higher rate
over £125,140	45%	Additional rate

Let's say your net taxable income for the whole year is £50k. If PAYE didn't scale the tax bands, then it would mean that around Christmas time each year, your income YTD, would pass over the £37,700 threshold, and your income tax would suddenly jump up. No one wants this. It's Christmas!

Therefore, all the tax band thresholds are scaled down YTD too. This means that even in April, right at the start of the tax year, with your notional £50k taxable income for this year ahead of you, you're already paying a bit of higher-rate tax, right from month 1 (April). It means that the amount of tax you pay remains the same throughout the year - there are no surprises if your salary remains constant.

But, imagine instead that in April on its own, you earn £70k and then you're unemployed for the rest of the year. Well essentially the tax calculations will assume your salary is going to be £70k*12 = £840k, and so in April you're going to be paying a lot of additional-rate tax. 11 months later or so, you'll probably be able to claim back a lot of tax as it turns out you should have never paid any tax in the additional-rate band at all (plus, you only got to use up 1 month's-worth of your personal allowance, so you've actually over-paid tax for two reasons).

From what I can tell, PAYE is quite cleverly designed so that:

• If you remain employed then once your income tax stabilises, it'll then remain steady throughout the year.
• It's far more likely you over-pay tax (either by not using up your personal allowance, or by the income tax calculations making the assumption that your earnings YTD are a proportional scaling of your total eventual annual income), than under-pay tax. From HMRC's point-of-view, this is a good thing.

National Insurance Contributions

This is totally different. There is no YTD scaling stuff going on here. If your National Insurance Contribution letter is A, then for 2024:

Monthly income	NIC tax rate
£1048 - £4189	8%
over £4189	2%

So you just take your current monthly income (gross! - don't do any of the subtraction of pensions or personal allowance etc), and plug it in to the above table and that's that.

Net income

Finally then, your net income, or take-home pay, should be more or less:

gross monthly salary - employee pension contribution - income tax - NIC tax

Note that personal allowance doesn't appear here at all - that's only used for calculating your income tax.