The terms at a glance
The one-line versions first. The sections below give the detail.
| Term | In one line |
|---|---|
| Personal Allowance | The £12,570 you can earn before paying Income Tax |
| Tax code | A number and letter telling your employer what allowance and rates to apply |
| PAYE | Pay As You Earn, the system employers use to take tax from wages |
| National Insurance | A separate tax on earnings that funds the State Pension and benefits |
| Gross pay | Your pay before any deductions |
| Net pay | Your pay after tax, NI and other deductions, also called take-home pay |
| Taxable income | The part of your income that tax is actually charged on |
| Adjusted net income | Total income minus certain reliefs, used for allowance tapering |
| Marginal rate | The tax on your next pound earned |
| Effective rate | Your total tax bill as a share of your income |
| Tax year | 6 April to 5 April the following year |
| Salary sacrifice | Giving up part of your salary for a benefit such as a pension |
| Benefit in kind | Something an employer provides, such as a car, that you pay tax on |
| Self Assessment | The tax return some people file for income taxed outside PAYE |
| UTR | Your ten-digit Unique Taxpayer Reference for HMRC |
Tax codes and PAYE
Tax code: your employer applies it to work out your tax-free pay. Multiply the number by ten for the allowance: 1257L means £12,570. The letter sets the rules, so L is the standard allowance, BR taxes everything at the basic rate and K adds income instead of allowing it. A wrong code is the most common reason for paying the wrong amount of tax through your job.
PAYE (Pay As You Earn): the system that takes Income Tax and National Insurance from your wages before you receive them. Your employer reports each payment to HMRC in real time, and most employees never need a tax return because PAYE settles the year through your pay.
Emergency tax code: a temporary code, usually with W1, M1 or X, used when your employer lacks the details to apply your normal allowance. It can tax you more than you owe until HMRC issues the right code.
P45 and P60: your P45 shows pay and tax to the date you leave a job and goes to your next employer. Your P60 is the year-end summary of everything you were paid and taxed. Keep both; HMRC and lenders ask for them.
Self Assessment and UTR: Self Assessment is the tax return used for income outside PAYE, such as self-employment or rental income. Your UTR is the ten-digit number HMRC gives you to file it.
Income Tax, National Insurance and other rates
Income Tax: the tax on most income, including wages, pensions, profits and rent. For 2026/27, England, Wales and Northern Ireland have 20%, 40% and 45% rates; Scotland has its own five-band system. The Income Tax bands guide linked below sets out every band.
National Insurance: a separate charge on earnings that builds your entitlement to the State Pension and some benefits. Employees pay 8% on earnings between £12,570 and £50,270 and 2% above that, and it is calculated each pay period rather than over the year.
Dividend allowance: the first £500 of dividends each tax year is tax-free. Above that, dividend tax is 8.75%, 33.75% or 39.35% depending on which band the dividends fall into.
Capital Gains Tax: charged on profit when you sell assets such as shares or property. The first £3,000 of gains each year is tax-free, and the rate on the rest is 18% or 24% depending on your Income Tax band and the asset.
Pay, allowances and benefits
Personal Allowance: the amount of income you can receive each year before Income Tax starts. It is £12,570 for 2026/27, and it falls by £1 for every £2 of adjusted net income above £100,000.
Gross and net pay: gross is what you earn before deductions; net, or take-home pay, is what lands in your account after Income Tax, National Insurance, pension and anything else comes off. The gap is why a £40,000 salary does not mean £40,000 in the bank.
Taxable income: the slice of your income that tax is charged on. Income covered by the Personal Allowance is not taxable income.
Adjusted net income: your total taxable income minus certain reliefs, mainly pension contributions and Gift Aid donations. HMRC uses it to decide whether the Personal Allowance taper applies and whether you keep Child Benefit.
Marginal and effective rates: your marginal rate is the tax on the next pound you earn, so it is 20%, 40% or 45% for most people, and 60% in the Personal Allowance taper. Your effective rate is your whole tax bill divided by your whole income, and it is always lower.
Salary sacrifice: an arrangement where you give up part of your salary in return for something like pension contributions or a bike. Because the pay is never received, you save Income Tax and National Insurance on it.
Benefits in kind: non-cash rewards from your employer, such as a company car or private medical insurance. They are usually taxed, and HMRC often collects the tax by adjusting your tax code.
Student loan plans: repayments are taken through payroll at 9% of earnings above your plan's threshold, or 6% for postgraduate loans. Which plan you are on depends on when and where you studied.
Similar words can describe different amounts
Gross pay, taxable pay and take-home pay are not interchangeable. When checking a calculation, identify which amount a document or example uses before transferring it into another comparison.
Try it with your own numbers
Work out how much UK Income Tax you'll pay in 2026/27, band by band.
Frequently asked questions
What does a tax code like 1257L actually mean?
The number times ten is your tax-free allowance for the year, so 1257L means £12,570. The L says you get the standard Personal Allowance. Other letters change the rules, for example BR taxes everything at the basic rate.
Check it on GOV.UK: Tax codes (opens GOV.UK in a new tab)
Is National Insurance the same as Income Tax?
No. They are separate charges with different thresholds and rules. Income Tax is calculated cumulatively across the year; National Insurance for employees is worked out separately each pay period, and it counts towards your State Pension entitlement.
Check it on GOV.UK: National Insurance rates and category letters (opens GOV.UK in a new tab) · Income Tax rates and allowances (opens GOV.UK in a new tab)
What is the difference between gross pay and net pay?
Gross pay is your pay before anything is taken off. Net pay, or take-home pay, is what remains after Income Tax, National Insurance, pension contributions and other deductions.
Check it on GOV.UK: Tax on your private pension (opens GOV.UK in a new tab) · National Insurance rates and category letters (opens GOV.UK in a new tab)
What is adjusted net income used for?
It decides whether the Personal Allowance taper above £100,000 applies and whether you keep Child Benefit. You work it out by taking total taxable income and subtracting grossed-up pension contributions and Gift Aid donations.
Check it on GOV.UK: Tax on your private pension (opens GOV.UK in a new tab) · Income Tax rates and allowances (opens GOV.UK in a new tab)
Sources
- GOV.UK: Income Tax rates and Personal Allowances
- GOV.UK: Tax codes
- GOV.UK: National Insurance rates and categories
- GOV.UK: PAYE for employers
Tax year 2026/27. Check these official sources for current rules and deadlines.
Related calculators
- Income Tax Calculator — Work out how much UK Income Tax you'll pay in 2026/27, band by band.
- Tax Code Calculator — Check your tax code: enter the code from your payslip and your salary to see the Income Tax you pay each month and each year.
- Take Home Pay Calculator — Find your UK take-home pay after tax, NI, pension and student loan for 2026/27.
- National Insurance Calculator — Calculate employee Class 1 National Insurance for 2026/27.
- PAYE Calculator — Estimate PAYE Income Tax and NI using your own tax code for 2026/27.
Related guides
- Tax Codes Explained — What your tax code means, from 1257L to K codes, BR, D0, NT and emergency codes, and what to do if yours looks wrong.
- How PAYE Tax Works — A plain-English explanation of PAYE: how employers deduct tax, what cumulative coding means, and why your payslip changes month to month.
- The Personal Allowance Explained — How the £12,570 Personal Allowance works, who loses it, the £100,000 taper and the 60% trap, plus ways to protect it.
- National Insurance Rates 2026/27 — Current UK National Insurance rates and thresholds for employees, employers and the self-employed, with category letters explained.