Pay As You Earn (PAYE) is the system you use to deduct Income Tax from your employees' pay and send it to HMRC. This article explains how PAYE Income Tax works in the 2026 to 2027 tax year: how it is collected, the difference between gross and taxable pay, the rates and bands, and how refunds happen through payroll. For how to read and apply tax codes, see the companion article Tax codes explained.
How does Income Tax get collected through payroll?
PAYE is HMRC's system for collecting Income Tax and National Insurance directly from employees' wages, salaries and occupational pensions as they are paid. As the employer, you calculate the tax due on each payment using the employee's tax code, deduct it, and report it to HMRC on or before payday through a Full Payment Submission. The aim is to spread an employee's tax bill evenly across the year so that by the final pay period they have paid roughly the right amount and do not face a large balance. Income Tax is only one of the deductions PAYE handles; National Insurance, student loan repayments and pension contributions are calculated separately under their own rules.
What is the difference between gross pay and taxable pay?
Gross pay is the total you pay an employee before any deductions, including basic salary, overtime, bonuses, commission and most allowances. Taxable pay is the figure Income Tax is actually calculated on, and it is usually lower than gross pay because some amounts are removed before tax is worked out. The most common reduction is an employee pension contribution made under a net pay arrangement or salary sacrifice, which comes off before tax. Other items, such as payrolled benefits in kind, may instead increase the taxable figure. The tax calculation always works from taxable pay to date, not gross pay, so when you reconcile a payslip it is the taxable pay figure that should match the tax due.
What are the Income Tax rates and bands for 2026 to 2027?
For employees taxed under the rest-of-UK rules (England and Northern Ireland), the 2026 to 2027 rates apply to taxable income after the Personal Allowance. The Personal Allowance of £12,570 is taxed at 0%; the basic rate of 20% applies to taxable income from £1 to £37,700 above the allowance; the higher rate of 40% applies from £37,701 to £125,140; and the additional rate of 45% applies above £125,140. In practice an employee with the standard Personal Allowance starts paying higher-rate tax once total income exceeds £50,270 (the £12,570 allowance plus the £37,700 basic-rate band). Welsh taxpayers use the same rates and bands for 2026 to 2027; Scotland has its own bands, covered in the tax codes article.
How does the Personal Allowance taper work above £100,000?
Employees with adjusted net income above £100,000 lose part or all of their Personal Allowance. For every £2 of income above £100,000, the allowance is reduced by £1, so it tapers away gradually and is completely gone once income reaches £125,140 (£100,000 plus twice £12,570). Within the £100,000 to £125,140 band the effective marginal rate is around 60%, because each extra pound both attracts higher-rate tax and removes 50p of allowance that then also becomes taxable. HMRC normally manages the taper by issuing an adjusted tax code rather than expecting you to calculate the reduction; your job is to apply the code HMRC sends.
What is the difference between a cumulative and a non-cumulative (Week 1 / Month 1) basis?
A cumulative tax code looks at the employee's total taxable pay and total tax-free allowance for the year to date, recalculating the correct position at every pay period. So if too much or too little tax was deducted earlier in the year, a cumulative code automatically corrects it in the next payment, which can produce a refund through payroll. A non-cumulative code, shown as Week 1 or Month 1, ignores everything before and treats each pay period in isolation, giving only that period's slice of the allowance. Non-cumulative operation is used where HMRC does not want previous pay and tax to affect the current calculation, for example for many new starters or where a code has just changed.
Can an employee get a tax refund through payroll?
Yes. Where an employee is on a cumulative tax code, your payroll software recalculates their tax position for the whole year to date at each pay period, and if they have paid too much tax it produces a refund in that pay period. This commonly happens when someone has a gap in earnings, a drop in pay, or starts work part way through the year with unused Personal Allowance building up. A refund only happens automatically on a cumulative basis; an employee on a Week 1 or Month 1 code will not receive a back-dated refund through payroll, because each period is taxed in isolation, and any over-payment is instead reviewed by HMRC. If a code changes from non-cumulative to cumulative during the year, the first cumulative calculation can trigger a sizeable refund.
How do student loans and pension contributions interact with Income Tax?
Student loan repayments and pension contributions are deducted through payroll alongside Income Tax, but they are calculated under their own rules rather than as part of the tax code. Student loan deductions are based on earnings above a threshold for the plan type and are worked out separately, so a tax code never changes a student loan deduction directly. Pension contributions can affect the taxable pay figure: contributions under a net pay arrangement or salary sacrifice reduce the pay on which Income Tax is calculated, while relief-at-source contributions do not change taxable pay. The key point is to establish the correct taxable pay figure first, after any pension reduction, before applying the tax code. See the separate articles on student loan deductions and on workplace pensions.
Where can I find the official 2026 to 2027 tax figures?
The figures in this article are grounded in HMRC's official 2026 to 2027 tax calculation specifications, which set out the expected tax due for each scenario, and the RTI Data Item Guide, which covers reporting. The Personal Allowance is frozen at £12,570 and the rest-of-UK bands are basic 20%, higher 40% and additional 45%. If you are ever unsure which code or basis to apply, follow the coding notice HMRC has issued, and direct employees with personal tax queries to HMRC, since only HMRC can change an individual's tax code. For reading and applying tax codes, see the companion article Tax codes explained.