When you look at your UK payslip, it’s common to see deductions labeled PAYE, National Insurance, and Income Tax. But what do these really mean? And if you're a business owner, what are your responsibilities?
At S&D Financial Solution Limited, we help UK-based small businesses, freelancers, and employees make sense of payroll and taxes—because financial clarity means financial confidence.
Here’s a clear, jargon-free breakdown of how these deductions work in the UK.
✅ What is PAYE?
PAYE stands for Pay As You Earn. It’s a system used by HMRC (His Majesty’s Revenue & Customs) to collect Income Tax and National Insurance directly from employees’ salaries.
👥 For Employers:
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You're legally required to calculate and deduct Income Tax and NI from employee wages before paying them.
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You must then submit these deductions to HMRC—usually on a monthly basis.
💼 For Employees:
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You don’t have to do anything manually—your employer handles the deductions.
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Your payslip will show how much was deducted for Income Tax and National Insurance through PAYE.
PAYE = the method HMRC uses to collect tax and NI.
✅ What is Income Tax?
Income Tax is what you pay to the UK government based on how much you earn. It funds public services like healthcare, education, roads, and national defense.
📊 UK Income Tax Bands (2024/25):
| Band Name | Income Range | Tax Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 – £50,270 | 20% |
| Higher Rate | £50,271 – £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
💡 Note: Your Personal Allowance (the amount you earn tax-free) may reduce if your income exceeds £100,000.
✅ What is National Insurance?
National Insurance (NI) is a separate deduction from your wages. It helps fund:
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The State Pension
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The NHS
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Unemployment support
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Maternity allowance and other benefits
You and your employer both pay NI contributions, depending on your employment type and income.
🧾 NI Categories for Employees (Class 1 Contributions):
| Weekly Earnings | NI Rate Paid by Employee | NI Rate Paid by Employer |
|---|---|---|
| Below £242 | 0% | 0% |
| £242 – £967 | 12% | 13.8% |
| Above £967 | 2% | 13.8% |
Rates can change each tax year – check gov.uk for updates.
✅ PAYE vs Income Tax vs National Insurance (At a Glance)
| Term | Who Pays It? | What It’s For | How It's Collected |
|---|---|---|---|
| PAYE | Employer (on behalf of employee) | A system for collecting tax & NI via salary | Through payroll deductions |
| Income Tax | Employee | General government funding | Deducted via PAYE |
| National Insurance | Employee & Employer | Pensions, NHS, welfare services | Deducted via PAYE |
✅ Responsibilities as a UK Employer
If you employ people, you must:
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Register for PAYE with HMRC
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Calculate correct tax and NI every time you run payroll
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Report payroll information to HMRC on or before payday
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Pay HMRC by the 22nd of each month (or 19th if paying by post)
Mistakes or late submissions can lead to penalties. That’s why many business owners work with payroll professionals like S&D Financial Solution Limited.
🧠 Why This Matters for Employees
Even though deductions are automatic, you should:
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Check your tax code regularly
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Make sure your NI number is correct
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Keep track of your annual income
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Claim refunds if you’ve overpaid tax
💡 Tip: Use the HMRC app or online portal to view your contributions and tax history.
❓ FAQs
🔹 Can I claim a tax refund if I overpaid?
Yes. If HMRC finds you've paid too much (e.g. due to wrong tax code or job changes), you may be eligible for a refund. You can apply online or via post.
🔹 I’m self-employed—do I use PAYE?
No. Self-employed individuals pay Income Tax and National Insurance (Class 2 & 4) via Self Assessment, not PAYE.
🔹 Can my tax code be wrong?
Absolutely. Wrong tax codes are a common cause of overpayment. If your code looks odd, check with HMRC.
👨🏽💼 How We Can Help
At S&D Financial Solution Limited, we provide:
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Full payroll setup and processing for UK businesses
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PAYE and NI calculations and submissions
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Monthly RTI (Real Time Information) reporting
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Payslip generation for staff
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Tax code review and adjustments
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Support for self-employed individuals with Self Assessment
We ensure your payroll is accurate, compliant, and stress-free.
📞 Ready to Simplify Your Payroll?
Whether you're hiring your first employee or managing a team, let S&D Financial Solution Limited handle your payroll, PAYE, and tax obligations—professionally and remotely.
👉 Contact us today or
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