Gross Pay vs Net Pay: The Basics
Every payslip shows two key figures: gross pay and net pay. Understanding the difference is the starting point for reading everything else.
- Gross pay is your total earnings before any deductions — your contracted salary, plus overtime, bonuses, and statutory payments.
- Net pay (also called take-home pay) is what actually reaches your bank account after Income Tax, National Insurance, pension, student loan, and any other deductions have been removed.
The gap between the two can be surprisingly large. A £35,000 salary produces roughly £27,500–£28,000 in net pay after tax and NI. Understanding every deduction that creates that gap is what this guide covers.
Gross Pay
Your gross pay is the total amount you have earned before any deductions. It includes:
- Basic pay: Your contracted salary or hourly wages for the pay period
- Overtime: Any additional hours worked at your overtime rate
- Bonuses and commissions: Performance-related payments, sales commission, or annual bonuses
- Statutory pay: Such as Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), or Statutory Paternity Pay (SPP)
- Holiday pay: If applicable (sometimes shown separately)
If you are paid monthly, your gross pay should match your annual salary divided by 12. If it does not, check whether a bonus, overtime, or salary sacrifice arrangement is affecting the figure.
Your Tax Code
Your payslip should show your tax code. This is issued by HMRC and tells your employer how much tax-free income to apply before deducting tax. The most common tax code for 2026/27 is 1257L, which represents a Personal Allowance of £12,570.
Here is how to decode the most common codes:
- The number (e.g. 1257) represents your tax-free allowances multiplied by 10. So 1257 = £12,570 of tax-free income.
- L — standard Personal Allowance applies.
- BR — all income taxed at 20% basic rate. Usually a second job where your allowance is used by your main employer.
- D0 — all income taxed at 40% higher rate. Used for a second income source for higher earners.
- K — your deductions (e.g. benefits in kind) exceed your allowances. Tax is collected by adding to your taxable income rather than subtracting an allowance.
- NT — no tax deducted. Rare, used in specific circumstances agreed with HMRC.
- S prefix (e.g. S1257L) — Scottish taxpayer, subject to Scottish Income Tax rates.
- C prefix (e.g. C1257L) — Welsh taxpayer.
Emergency Tax Codes: W1, M1, and 0T
If you start a new job without handing over a P45 from your previous employer, HMRC may place you on an emergency tax code. These are the three you will most commonly see:
- 1257L W1 (Week 1 basis) — Tax is calculated on your earnings for that week alone, ignoring what you have earned or paid earlier in the tax year. You may overpay or underpay.
- 1257L M1 (Month 1 basis) — The same as W1 but applied to monthly-paid employees. Very common when starting a new role mid-year.
- 0T — No Personal Allowance is applied at all. Every pound of income is taxed from the first penny. This almost always means you are paying too much tax.
Emergency codes are temporary. Once HMRC receives your employment information — usually within a few weeks — your code updates and any overpaid tax is refunded through your payslip. If it is not resolved after a month, contact HMRC directly through your Personal Tax Account on GOV.UK. Leaving an emergency tax code in place for a full year can mean hundreds of pounds in overpaid tax.
Income Tax Deduction
The income tax line shows how much tax has been deducted for this pay period via the Pay As You Earn (PAYE) system. For 2026/27 in England and Wales:
- Personal Allowance: £12,570 — no income tax on the first £12,570
- Basic rate: 20% on taxable income up to £50,270
- Higher rate: 40% on taxable income from £50,271 to £125,140
- Additional rate: 45% on taxable income above £125,140
PAYE works on a cumulative basis across the tax year. If you receive a large bonus in one month and overpay tax, a quieter month later in the year may show a lower tax deduction or even a small refund as the system recalculates. This is normal. Scottish taxpayers pay different rates set by the Scottish Parliament — their payslip shows an S prefix on the tax code.
National Insurance Contributions
National Insurance (NI) is a separate deduction from income tax, collected through PAYE on your payslip. NI contributions build your State Pension entitlement and qualify you for certain contributory benefits. For a full breakdown of how income tax and NI interact, see our UK tax brackets guide. For employees in 2026/27:
- Below £6,396 per year: No NI deducted and no State Pension credit
- £6,396 to £12,570 per year: No NI deducted, but you receive a qualifying year credit towards your State Pension
- £12,570 to £50,270 per year: 8% employee NI
- Above £50,270 per year: 2% employee NI
Your payslip may also show an employer NI contribution. This is paid by your employer at 15% on earnings above £5,000 per year. It does not reduce your take-home pay, but it is worth knowing when negotiating a salary increase — it represents an additional cost to your employer on top of your gross pay.
Pension Contributions
Under auto-enrolment, most employees are automatically enrolled into a workplace pension. The minimum contributions for 2026/27 are:
- Employee contribution: 5% of qualifying earnings (including 1% basic rate tax relief)
- Employer contribution: 3% of qualifying earnings
Qualifying earnings are the portion of your salary between £6,240 and £50,270 per year. Some employers offer more generous schemes or calculate contributions on your full salary.
Check whether your scheme operates on salary sacrifice (contribution deducted before tax and NI, reducing your gross pay and tax bill) or relief at source (deducted from net pay, with the pension provider claiming back basic rate tax relief and adding it to your pot). Both are shown as deductions on your payslip but work differently.
Student Loan Repayments
If you have a student loan, repayments are collected through PAYE once your earnings exceed the relevant threshold. The confirmed thresholds for 2026/27 are:
- Plan 1 (pre-2012 English/Welsh loans, and all Scottish/NI loans): 9% on earnings above £26,065 per year
- Plan 2 (post-2012 English/Welsh loans): 9% on earnings above £28,470 per year
- Plan 4 (post-2012 Scottish loans): 9% on earnings above £32,745 per year
- Plan 5 (loans from 2023/24 onwards): 9% on earnings above £25,000 per year
- Postgraduate loan: 6% on earnings above £21,000 per year
If you are on more than one plan, repayments are calculated and deducted separately for each. Check that the correct plan is shown on your payslip — the wrong plan number means you could be overpaying or underpaying. You can confirm your plan type on the Student Loans Company portal via GOV.UK.
Other Common Deductions
Your payslip may include additional deductions such as:
- Salary sacrifice schemes: Cycle to work, electric car leasing, or additional pension contributions — deducted before tax, reducing your gross pay and tax bill
- Childcare vouchers: If you joined a scheme before October 2018 (now closed to new entrants)
- Trade union subscriptions: Deducted at source if agreed with your employer
- Attachment of earnings: Court-ordered deductions for debts such as council tax arrears or child maintenance
Year-to-Date Figures
Most payslips include year-to-date (YTD) totals showing cumulative pay and deductions since 6 April (the start of the tax year). These figures help you check whether your cumulative tax is correct, and they feed directly into your P60 at the end of the year. If a YTD total looks wrong — for example, it suggests you have paid significantly more or less tax than you would expect — raise it with your payroll department.
P60, P45, and P11D: Documents That Go With Your Payslip
Your payslip is not the only document your employer must issue. Three others are closely related:
- P60: Issued to every employee still employed on 5 April (the end of the tax year). It summarises your total pay and deductions for the full tax year and is your official proof of income — needed for mortgage applications, tax returns, and benefit claims. Employers must issue it by 31 May. Keep every P60 permanently.
- P45: Issued when you leave a job. It shows your total pay and tax paid in the current tax year up to your leaving date. Give it to your next employer so they can set up your tax code correctly without placing you on an emergency code.
- P11D: Issued if you receive taxable benefits in kind from your employer (such as a company car, private medical insurance, or a beneficial loan over £10,000). HMRC uses the P11D to adjust your tax code for the following year.
Why Has My Take-Home Pay Changed?
Common reasons your net pay changes month to month include:
- A bonus, commission, or overtime payment increasing gross pay
- A salary sacrifice arrangement starting or ending
- A tax code change issued by HMRC (check for a letter or Personal Tax Account notification)
- Student loan repayments starting because your earnings crossed the threshold for the first time
- Auto-enrolment pension contributions starting after a qualifying waiting period
- PAYE cumulative adjustments correcting over- or underpayment from earlier months
- A pay rise moving you into a higher NI or tax band
Calculate Your Expected Take-Home Pay
If something on your payslip does not look right, the quickest way to check is to run the numbers yourself. Use our free take-home pay calculator — enter your salary, tax code, pension contribution, and student loan plan and it will show you exactly what your net pay should be for 2026/27. Compare the result with your payslip to spot any discrepancies and take action.
Frequently Asked Questions
What is the difference between gross pay and net pay?
Gross pay is your total earnings before any deductions. Net pay (take-home pay) is what you receive after Income Tax, National Insurance, pension contributions, student loan repayments, and any other deductions. For most employees, net pay is 20–35% lower than gross pay depending on their income level.
What does 1257L mean on a payslip?
1257L is the standard UK tax code for 2026/27. The number 1257 represents your Personal Allowance (£12,570) divided by 10 — meaning you can earn £12,570 before paying income tax. The letter L confirms you are entitled to the standard Personal Allowance. If your code is different, it reflects a benefit in kind, a second job, an adjustment from HMRC, or Scottish/Welsh taxpayer status.
What is an emergency tax code and how do I fix it?
Emergency tax codes (1257L W1, 1257L M1, or 0T) are applied when your employer cannot obtain your tax information from HMRC — usually when you start a new job without providing a P45. They mean your tax may be calculated incorrectly. To fix it, provide your P45 to your new employer or contact HMRC via your Personal Tax Account. Any overpaid tax will be refunded through your payslip once the correct code is applied.
What is a P60 and where can I get one?
A P60 is an annual summary of your total pay and deductions, issued by your employer by 31 May each year for the tax year ending 5 April. You need it for Self Assessment tax returns, mortgage applications, and benefit claims. If you have lost a P60, ask your employer to reissue it or download the information from your HMRC Personal Tax Account.
Can I claim back overpaid tax?
Yes. Log in to your HMRC Personal Tax Account to see your tax position. If you have overpaid — due to an incorrect tax code, stopping work mid-year, or starting a pension — HMRC usually issues a refund automatically. You can also claim it directly through your Personal Tax Account. HMRC can typically go back four years for repayment claims.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers pre-2012 English and Welsh loans and all Scottish and Northern Irish loans. Plan 2 is for post-2012 English and Welsh undergraduate loans. Plan 4 is for post-2012 Scottish undergraduate loans. Plan 5 applies to loans taken out from 2023/24 onwards. Postgraduate master's and doctoral loans are separate. Check your plan type by logging into the Student Loans Company via GOV.UK.