Understand Payroll Taxes and Deductions in the UK

Nothing can replace the excitement of getting a paycheck after working hard for a week, or month. But when you pick your payroll, the exact question you ask for yourself is “What are these taxes and deductions on my payroll?” Right? Well, that is why we have decided to write down a complete educational guide for you so you will understand what your payrolls tell you.

The UK is the country of dreamers and working in the United Kingdom brings some exceptional benefits that are not available in other countries. However, with high par rates, there are some taxes as well. To understand these deductions and taxes, please read this guide carefully.

If you haven’t used our take-home pay calculator then use it now to check what is your net income after all the deductions in no time.

Payroll Taxes and Deductions in the UK

The UK has a proper and managed taxation system. From lower salaries to high salaries citizens, each class has to pay a different amount of tax from their salaries. However, if you are earning less than £12,570 per month then your tax is 0.

In the UK, both employers and employees have to pay National Insurance Contributions(NICs), which help fund things like healthcare and state benefits. Besides the NICs, citizens also have to contribute to a pension scheme.

Those who are getting benefits from a job like a car and health insurance have to pay the tax for that too.

Here are some of the most common taxes and deductions in gross payment in the UK.

National Insurance Contributions (NICs):

National Insurance Contributions (NICs) is the welfare program for those who are disabled, ill, unemployed, on maternity leave and retired. The payment that the UK government collects is in the form of NICs funds spent on these vulnerable people. 

The tax rate of NICs payment is mostly 13.8%. However, this is based on the category letter of the employee’s national insurance. But 13.8% is the most common rate that falls under the category A.

Every employee who is earning £242 to £967 per week will have to pay the NICs tax. However, if your earnings are more than £967 then you have to pay 2% more tax.

Benefits in Kind (BIKs):

Benefits in Kind (BIKs) are like extra perks or benefits that you get from your job, besides your regular salary. 

These could be things like a company car, private healthcare, or even free meals at work. But here’s the catch: sometimes you have to pay a bit of tax on these benefits because they’re considered part of your overall earnings.

Employers have to pay the tax to the government when they provide extra perks to their employees. it’s usually around 13.8% of the value of those perks. However, the employee also has to pay the tax on BIKs and the amount of the tax depends on various factors.

Workplace Pension:

The government of the UK has made it mandatory for employers to run a workplace pension scheme for the employees. This pension scheme is contributed by both employer and employee.

However, the contribution rate depends on various factors but employers have to pay at least a 3% minimum contribution of a total of 8%.

Also, there are some circumstances where employees can set themselves free from the pension scheme contribution. For example, if an employee belongs to the European Union (EU) state and also paying for the cross-border pension scheme, he/she is not entitled to pay the pension contribution.

All the employees who are earning more than £10,000 yearly have to contribute to this pension scheme.

Employee Income Taxes 2024

Employees are entitled to pay the income tax according to their paychecks. Employees are not required to contribute to the income tax of their employees. However, they are responsible to collect and pay the tax on behalf of their employees.

The tax ratio is based on the earnings of the employee. For example, if an employee is earning less than £12,570 per year then there is no income tax for those.

To understand the tax ratio of income tax in England, Whales and North Ireland, you need to check the below table.

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	over £125,140	45%

For Scotland, this is the income tax in 2024:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Starter	£12,571 to £14,732	19%
Basic rate	£14,733 to £25,688	20%
Intermediate rate	£25,689 to £43,662	21%
Higher rate	£46,663 to £125,140	42%
Additional rate	over £125,140	47%

F.A.Q

How is payroll tax calculated in the U.K.?

In the UK, the government uses the Pay As You Earn (PAYE) system. Also, once you earn a certain amount, you will be taxed for your earned money. The taxes vary based on your salary and type of job.

What are the payroll taxes in the UK?

Here are the examples of payroll taxes in the UK:

• Benefits in kind (BIKs)
• National Insurance Contributions (NICs)
• Work Place Pension
• Income Tax

What taxes are deducted from your paycheck UK?

There are different kinds of taxes that are deducted from an employee’s wage. First of all, you need to pay a 13.8% NICs payment, and then there will be an income tax if you are earning more than £12,570. You also need to pay a certain amount for your pension scheme.

What is the PAYE tax deduction in the UK?

PAYE stands for Pay As You Earn. PAYE tax deduction is the system where employers take out income tax and National Insurance Contributions (NICs) from their employees’ paychecks before handing over the money to them. This system helps spread out the tax burden across the year, making it easier for people to manage their taxes.

How does payroll work in the UK?

In the UK, employers calculate employees’ pay, deduct taxes and contributions, pay the net amount to employees, and send the deducted taxes to HMRC.