UK PAYE, National Insurance and auto-enrolment: what comes off the pay, and what the employer adds

PAYE income tax: the code does the work

PAYE ("Pay As You Earn") is the mechanism by which the employer deducts income tax each payday on a tax code HMRC supplies. The code is the whole game: it encodes how much tax-free pay to give and — through its letters and prefixes — which rate table to apply. Get the code right and PAYE mostly runs itself; get it wrong and you either over- or under-deduct until HMRC issues a correction.

What the code means. GOV.UK: "The numbers in your tax code tell your employer or pension provider how much tax-free income you get from them in that tax year." The everyday code is 1257L — "the tax code currently used for most people who have one job or pension", where 1257 represents the £12,570 Personal Allowance (rUK, 2026-27) and L means "you're entitled to the standard tax-free Personal Allowance". The letters carry the nuance:

• L — standard Personal Allowance; M / N — Marriage Allowance received / transferred; T — the code "includes other calculations to work out your Personal Allowance".
• BR — "all your income from this job or pension is taxed at the basic rate"; D0 — at the higher rate; D1 — at the additional rate (these are common on a second job or pension).
• 0T — no allowance left (or a new job with no details yet); NT — no tax on this income.
• K (a prefix, not a suffix) — "You have income that you are not paying tax on which is more than your Personal Allowance." A K code adds to taxable pay rather than subtracting, so it is how HMRC collects tax on benefits in kind or underpayments through the code. There is a statutory limit on how much a K code can take from each payment.

Cumulative vs Week 1 / Month 1. A normal code is cumulative: the allowance is spread evenly across the year and every payday reconciles income and tax to date, so refunds and catch-ups happen automatically. An emergency code is non-cumulative and shows a W1, M1 or X marker (for example 1257L W1 for weekly pay, 1257L M1 for monthly, 1257L X for irregular pay dates). GOV.UK: "If you're on an emergency tax code your tax is worked out based on what you're paid in that week or month only" — you are "taxed as if you're paid that amount every week or month of the year", with no year-to-date reconciliation. Emergency codes typically arise when a new starter has no P45, and HMRC usually updates the code once it has the full picture.

England, Wales and Scotland: three rate tables, one payroll

Income tax rates on employment income are partly devolved, so a UK payroll must hold three tables and pick by tax code, not by where the payslip is posted. All three share the same £12,570 Personal Allowance (2026-27), and in all three it tapers "by £1 for every £2" of income over £100,000, reaching zero at £125,140. Above the allowance, they diverge.

England & Northern Ireland / Wales — the "rUK" table (2026-27). Wales sets its own Welsh Rates of Income Tax and Welsh taxpayers carry a C prefix on the code, but for 2026-27 Wales has set its rates equal to England & Northern Ireland, so they share one table:

• Basic rate — 20% on £12,571–£50,270.
• Higher rate — 40% on £50,271–£125,140.
• Additional rate — 45% above £125,140.

Scotland — genuinely different (2026-27). A Scottish taxpayer's code carries an S prefix, and the table has six bands, not three, on the same £12,570 allowance:

• Starter rate — 19% on £12,571–£16,537.
• Basic rate — 20% on £16,538–£29,526.
• Intermediate rate — 21% on £29,527–£43,662.
• Higher rate — 42% on £43,663–£75,000.
• Advanced rate — 45% on £75,001–£125,140.
• Top rate — 48% above £125,140.

The practical effect: a Scottish taxpayer crosses into higher marginal rates earlier (42% from £43,663 vs 40% from £50,271 in rUK) and tops out at 48% rather than 45%. Because HMRC drives this through the S or C prefix, the single thing payroll must get right is the code — apply the wrong prefix and you apply the wrong nation's table.

National Insurance: Class 1, and the bits around it

National Insurance runs on its own thresholds, entirely separate from the income-tax bands — a common source of confusion, because the numbers look similar but are not the same. Employment earnings attract Class 1 NICs in two directions: the primary contribution the employee pays, and the secondary contribution the employer pays on top. The four 2026-27 thresholds that shape it:

• Lower Earnings Limit (LEL) — £129/week, £559/month, £6,708/year. Earnings at or above the LEL protect contributory benefit entitlement even where no NI is actually payable.
• Primary Threshold (PT) — £242/week, £1,048/month, £12,570/year. Employees start paying primary NI above this.
• Secondary Threshold (ST) — £96/week, £417/month, £5,000/year. Employers start paying secondary NI above this.
• Upper Earnings Limit (UEL) — £967/week, £4,189/month, £50,270/year. Above this the employee rate drops.

Class 1 rates (2026-27, standard category A). The employee pays 8% on earnings between the Primary Threshold and the Upper Earnings Limit, then 2% on everything above the UEL. The employer pays 15% on all earnings above the Secondary Threshold, with no upper limit. (Other category letters — for example reduced rates for under-21s, apprentices under 25 or certain veterans and freeport/investment-zone workers — change the employer position, so check the category letter, not just category A.)

Class 1A and Class 1B. These are employer-only charges that sweep up things outside the ordinary payday cycle. Class 1A is due on most taxable benefits in kind (company cars, private medical cover and the like) and, for 2026-27, "the rate on expenses and benefits is 15%". Class 1B applies where an employer settles tax on minor or irregular items through a PAYE Settlement Agreement (PSA), and for 2026-27 it too is 15%. Both are reported and paid annually, not each payday.

The Employment Allowance. Eligible employers can reduce their annual secondary (employer) Class 1 NI bill by the Employment Allowance, which is £10,500 for 2026-27. It offsets the employer contribution only — it does nothing to the employee's primary NI or to income tax — and eligibility rules apply (for instance, connected-company and de-minimis-aid conditions).

Auto-enrolment: the duty, the trigger, the money

Since the Pensions Act 2008, an employer must automatically enrol qualifying staff into a workplace pension and pay into it — enrolment is the default and the worker has to actively opt out, not opt in. The duty is statutory: section 3 of the Act ("Automatic enrolment") provides that "the employer must make prescribed arrangements by which the jobholder becomes an active member of an automatic enrolment scheme with effect from the automatic enrolment date". That duty applies to a jobholder who is aged at least 22 and under State Pension age and who earns more than £10,000 in the relevant pay reference period.

The trigger and the band (2026-27). The Pensions Regulator publishes the figures each tax year, and for 2026/2027 they are:

• Earnings trigger for automatic enrolment — £10,000/year (about £192/week, £768 per four weeks). Earn above this (and fall in the age band) and the worker must be enrolled.
• Qualifying earnings band — lower level £6,240/year (£120/week), upper level £50,270/year (£967/week). Contributions are worked out on the slice of pay within this band, not on total pay.

Minimum contributions. The total minimum is 8% of qualifying earnings, of which the employer must pay at least 3%; the worker makes up the balance, so on the standard split the worker pays 5% including basic-rate tax relief. GOV.UK's worked example: on £80 into a pension, "you put in £40, your employer puts in £30, you get £10 tax relief." An employer may of course pay more than 3% (and if it funds the whole 8% the worker need not contribute), but 3% employer / 8% total is the floor.

Postponement. An employer can "postpone automatic enrolment for up to three months" from a worker's start date or the date they become eligible — useful for short-term or seasonal staff. Postponement only delays assessment; it is not an opt-out, staff can choose to opt in during the postponement period, and the employer "cannot apply a further period of postponement even if they postponed for less than the three months allowed". At the end of the window, anyone still eligible must be enrolled straight away.

Re-enrolment and re-declaration. The duty is not one-and-done. Roughly every three years the employer must "put certain staff who have left your pension scheme back into it" and — whether or not anyone needs re-enrolling — "complete a re-declaration of compliance" telling The Pensions Regulator how the duties were met. TPR is blunt that "re-enrolment and re-declaration are your legal duties and if you don't act you could be fined." Treat the three-year cycle as a standing diary entry, not a one-off setup task.

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