How UK income tax is calculated
UK income tax is not flat — it is progressive, meaning different portions of your income are taxed at different rates. For 2024/25: the Personal Allowance of £12,570 is tax-free. Income between £12,571 and £50,270 is taxed at 20% (the Basic Rate). Income between £50,271 and £125,140 is taxed at 40% (the Higher Rate). Income above £125,140 is taxed at 45% (the Additional Rate). Importantly, you do not pay 40% on all your income once you cross £50,270 — only on the portion above that threshold. On a £60,000 salary, you pay 20% on £37,700 and 40% on only £9,730.
National Insurance Contributions
National Insurance (NI) is a separate deduction from income tax and is frequently forgotten in salary calculations. For employees in 2024/25: you pay 8% NI on earnings between £12,570 and £50,270 per year, and 2% on earnings above £50,270. There is no NI on earnings below the Primary Threshold of £12,570. NI funds state benefits including the NHS, state pension, and maternity/paternity benefits. Unlike income tax, NI has no equivalent of the Personal Allowance for the higher rate — the 2% rate kicks in from the first pound above the upper earnings limit.
Pension contributions and other deductions
If you are enrolled in a workplace pension scheme under auto-enrolment, your employer deducts a minimum of 5% of qualifying earnings from your pay (the employer adds at least 3%). These contributions reduce your take-home pay but increase your total remuneration — and they are paid in pre-tax income, meaning the government effectively subsidises your pension saving. A basic rate taxpayer saving £80 per month into a pension costs them £80 but their pension receives £100 (the £20 tax relief added by HMRC). Student loan repayments, salary sacrifice arrangements, and childcare voucher schemes all reduce take-home further.
Why gross salary comparisons can mislead
Comparing two job offers solely on gross salary misses important variables. An employer contributing 10% to a pension versus 3% represents a significant salary difference in real terms. A car allowance, private health insurance, or flexible working arrangement has monetary value. Tax-free benefits like employer pension contributions, childcare vouchers, and cycle-to-work schemes reduce your tax burden. Always compare net pay plus the full benefits package, not just the headline figure. Our tax calculator shows take-home pay so you can compare offers on a like-for-like basis.
Self-employed tax: it is different
The tax calculator models employment income (PAYE). Self-employed income has a different NI structure: you pay Class 2 NI (a flat weekly rate) and Class 4 NI (9% on profits between £12,570 and £50,270, then 2% above). The headline rates are similar to employment but the self-employed receive no employer NI contribution, no sick pay, no holiday pay, and must file a Self Assessment return annually. The practical implication: a self-employed person earning £40,000 takes home less than an employee on the same salary once you account for the employer NI contribution (effectively reducing the cost to the employer).