Payslips and tax documents
How a payslip works, and the documents that record your income and tax.
A payslip is the receipt for your pay. It shows what you earned, what was taken off, and what actually lands in your account. The gap between the two is mostly tax and National Insurance, which fund public services, plus a pension if you pay into one. Learn to read a payslip and no deduction is a mystery.
Gross, deductions, net
Every payslip tells the same story in three parts. Gross pay is what you earned before anything is taken off. Deductions are the amounts taken out. Net pay, sometimes called take-home pay, is what is left, and what actually reaches your account.
The whole point of a payslip is to show where the difference went. Nothing vanishes; every deduction is listed.
Where the deductions go
The two big deductions for most employees are income tax and National Insurance. Both are paid to the government, which uses them to fund things like the NHS, schools, roads, and state benefits and pensions. Income tax is charged at different rates on different slices of your earnings, so people who earn more pay more.
Many people also have a workplace pension taken off, but that is different: it is your own money going into a pot for your retirement, not money going to the government. Other deductions can appear too, like a student loan repayment, childcare, or a cycle-to-work scheme.
The Personal Allowance and your tax code
Most people can earn a certain amount each year before they pay any income tax at all. This is called the Personal Allowance. Your tax code, which you are given each year, tells your employer how much tax-free pay to give you before tax starts.
In some situations the allowance can be reduced or lost, but for most people it simply means the first slice of pay each year is untaxed, and tax only starts above it.
If you work for yourself
Self-employed people do not get tax taken off automatically. Instead they are responsible for their own tax through Self Assessment, where they report what they earned and pay what they owe. Depending on how much profit they make, they may also have to pay National Insurance, and some people can choose to make voluntary contributions to protect things like their State Pension.
The documents that record it all
Two documents record your pay and tax over time. A P45 is given to you when you leave a job, and shows your pay and tax so far that year. A P60 is a summary you get at the end of each tax year, showing your total pay and the tax paid on it. Keep them, because you may need them to prove your income or to claim back tax you have overpaid.
A payslip in numbers
Illustrative, 2026/27. Assumes a standard tax code and no student loan; the exam gives you any rates you need.
- £2,400 gross a month (£28,800 a year). This is the starting figure, before anything is taken off.
- Income tax about £270 a month, National Insurance about £108 a month. That leaves roughly £2,020 take-home before any pension.
- Add a workplace pension (here an illustrative 5%, around £95) and take-home is about £1,925. The exact pension figure depends on the scheme.
- The pattern: the gap between gross and take-home grows as pay rises into higher tax bands.
- 'My take-home should be close to my salary.' It is not. Roughly a quarter can come off a typical salary once income tax, National Insurance and a pension are taken.
- 'A pension deduction is money lost.' Unlike tax, a pension contribution is your own money, saved for your future, and your employer usually adds to it as well.
- 'Everyone pays tax on all their pay.' Most people have a Personal Allowance, so the first slice of pay each year is tax-free.
Key terms
- Gross pay
- Total pay before any deductions.
- Net pay
- Take-home pay after deductions.
- Personal Allowance
- The amount most people can earn each year before paying income tax.
- Tax code
- A code that tells your employer how much tax-free pay to give you.
- P45 / P60
- Records of your pay and tax: a P45 when you leave a job, a P60 at the end of the year.
Not examined
Check your understanding
- What is the difference between gross pay and net pay?
- Name two things that might be deducted from a payslip, and say which one is not a tax.
- What is the Personal Allowance?
Show suggested answers
- Gross pay is your total pay before deductions; net pay is your take-home pay after deductions.
- Any two of income tax, National Insurance, a workplace pension or a student loan. A workplace pension is not a tax: it is your own money saved for retirement.
- The amount most people can earn each year before they start paying income tax.