Struggling to understand your payslip and deductions? Or are you an employer running your own payroll wanting to be able to explain payslips and the payslip deductions that appear to help your team members?
In this guide, I’ll run through the basics of payslips including what they are, how to read the different payslip deductions that appear as well as the information that legally needs to appear on them. Rest assured, you’ll have confidence when it comes to checking your payslips by the end of this guide and you’ll know whether you’re paying the right amount of tax.
As always, there’s no jargon, I promise! But there is quite a lot of information, so you may want to bookmark this page so you can come back to it in case you have a question in the future.
Updated 25 October 2021
Table of contents
- 1. What is a Payslip (Definition)
- 2. What Does a Payslip Look Like
- 3. How to Read a Payslip & Payslip Deductions
- 4. Personal Information, Tax Code & Pay Information
- 5. Gross Pay
- 6. Payslip Deductions
- 7. Net Pay
- 8. Employer Information
- 9. What Information Should Be On a Payslip
- 10. Should You Keep Your Payslip
- 11. Self-Employed Payslips
Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.
1. What is a Payslip (Definition)
A payslip is a legal document, either issued digitally or on paper, detailing how much an employee has been paid as well as any deductions made from their pay. The purpose of a payslip is to give the individual being paid absolute clarity on how much they’ve been paid and why deductions have been made before their salary hits their bank account.
It is a legal requirement for registered employers to send their employees a payslip every time they pay them. This requirement only relates to those employed under PAYE, so if you are self-employed and working for a company, you won’t receive a payslip when your invoices are paid.
2. What Does a Payslip Look Like
Payslips design can vary between employers because there is no set format they need to follow. However, employers are legally required to show certain information on payslips to ensure total clarity of what’s been paid.
Here is an example payslip:
3. How to Read a Payslip & Payslip Deductions
Payslips are typically split into different sections, despite any differences in appearances due to branding or page size, for example. These sections are usually:
- Personal Information, Tax Code & Pay Information
- Gross Pay
- Payslip Deductions
- Net Pay
- Employer Information
4. Personal Information, Tax Code & Pay Information
When you start to read a payslip, the first information you’ll most likely find is personal information on the person being paid, such as their full name and national insurance number.
Payslips are hugely confidential because they contain information about how much someone is paid, so if you are an employer you must make sure you have a robust system that ensures the right payslip reaches the right person.
Your payslip will show the period of pay. In the above payslip example, this is 31 May 2021, Period 2. When it comes to payroll, pay periods are based on the tax year (which runs from 6 April to 5 April each year) so May is month 2 for tax purposes.
As you continue to read your payslip, you’ll definitely see the tax code being used. Tax codes tell employers how much income tax they need to deduct from an individuals pay and personal allowance (or free-pay) they are entitled to. The most common tax code is 1257L for the tax year 2021/2022 (and 1250L for the tax year 2020/2021).
Tax codes are set by HMRC and employers are notified which ones to use either from a P45, starter checklist or via a P6 notification. Whether you are an employer or employee, it’s important to remember that HMRC sets out tax codes to use. So if you are an employer, you must always use the code sent to you by HMRC.
If you are an employee it can pay to check your code because mistakes do happen or HMRC may have based your code on historic information, which may be out of date. You can read more about tax codes in this guide, as well as how to check whether you are on the right one.
5. Gross Pay
Moving to the next section of the example payslip, you’ll see details of gross pay. This is the amount an employer agrees to pay someone as a ‘basic salary’ before deducting tax – usually the amount in the employment contract.
Any additional earnings such as bonuses, expense refunds or car allowance, will be included here most likely as a separate line item again for total clarity. Normally these additional earnings are subject to income tax and national insurance, although some, like expense reimbursement and childcare, can be tax-free.
6. Payslip Deductions
The next section can often cause the most confusion when reading a payslip. This section covers payslip deductions made that reduce the amount being paid to an individual. The most common deductions are:
- Income Tax which is deducted in accordance with the tax code of the individual
- National Insurance which is deducted according to how much the individual is paid during the pay period
- Pensions deducted in accordance with government guidelines and pension tax relief given on qualifying earnings
Employers know how much of each deduction to make in the above payslip because there are rules laid out by HMRC attached to each one of them, dictating how much people pay, usually depending on how much they earn.
6.1 Income Tax on Payslips
Your employer knows how much income tax your need to pay because HMRC issues everyone employed in a job with a tax code. They will find this on your P45 or starter checklist if they don’t have a P45 (previously called a P46).
A tax code is a numerical number, followed by a letter, that is issued by HMRC. Tax codes tell employers not just how much tax to deduct but also how much personal allowance (or free pay) you are entitled to. For 2021/2022 the most common tax code is 1257L (previously 1250L). You can find out more about how tax codes work in this guide, as well as how HMRC works them out for you and sends them to your employer.
The amount of tax you pay, depends on how much you earn – with those earning more paying a higher amount of tax. PAYE tax rates are paid on a sliding scale and change every tax year on the 6 April each year. The current income tax rates are:
|Personal allowance 0%||£12,570||£1,047.50|
|Basic rate 20%||£12,570 to £50,270||£1,047.50 to £4,189.17|
|Higher rate 40%||£50,271 to £150,000||£4,189.17 to £12,500|
|Additional rate 45%||over £150,000||over £12,500|
So say you are paid £3,000 each month, you will receive your annual personal allowance monthly in arrears too so that it matches how you get paid. By looking at the monthly rates in the table above your PAYE tax is worked out as follows:
|Personal Allowance 0% £1,047.50||£0.00|
|Basic rate 20% (£3,000 – £1,047.50 = £1,952.50)||£390.50|
|Total PAYE income tax||£390.50|
6.2 National Insurance on Payslips
National insurance is calculated based on the gross salary that you receive every time you are paid and is not related to your tax code. When you are employed by someone, you’ll pay Class 1 national insurance through the PAYE system.
The amount of national insurance you pay again depends on how much you earn and you are taxed at different NI rates. The current rates are:
|Employees Class 1 National Insurance 2021/2022||Weekly||Monthly||Annually|
|Lower Earnings Limit (LEL)|
Employees do not pay National Insurance but
get the benefits of paying
|Primary Threshold (PT)|
Employees start paying National Insurance
|Secondary Threshold (ST)|
Employers start paying National Insurance
|Upper Earnings Limit (UEL)|
All employees pay a lower rate of National Insurance
above this point
|Employee Rates||12%||Between the Primary Threshold and Upper Earnings Limit|
|2%||Above Upper Earnings Limit|
|Employer Rates||13.8%||Above the Secondary Threshold|
So in the example payslip above, Amy earns £2,500 per month so pays national insurance of £204.36 calculated as £2,500 – £797 x 12%.
6.3 Pension Contributions on Payslips
Both you and your employer are legally obligated to contribute directly into an approved workplace pension scheme every time you get paid – it’s the Government’s way of forcing us to save for our retirement.
As part of the PAYE scheme, you’ll need to put away a percentage of your salary (known as ‘qualifying earnings’) and your employer must add some in too. The current workplace contributions are 5% from the employee and 3% from the employer. In addition, you’ll receive income tax relief on you the amount you put away.
|Qualifying Earnings 2021/2022||Annual Thresholds||Monthly Thresholds|
|Lower Earnings Limit||£6,240||£520|
|Upper Earnings Limit||£50,000||£4,167|
In the example above, Amy earns £2,500 per month, so her own pension contribution is £99.00 (£2,500 – £520 = £1,980 x 5%).
7. Net Pay
Net pay is the amount left from gross pay after the above payslip deductions, which is paid to the employee. The employer is responsible for paying over any payslip deductions made to the appropriate authorities. For example, income tax & national insurance must be paid to HMRC and pensions to the Company workplace pension scheme like Nest.
This system of deducting and paying over by employers is known as the PAYE system. This system makes businesses registered as employers responsible for making deductions from their employees’ salaries and paying the amounts over on their behalf.
8. Employer Information
The final section when reading through the payslip above is information about the employer. We can see their employer reference number, 475/FC12345, which is their employers reference number.
You’ll also see details of Employers employers national insurance and pension contributions. Employers are legally obliged to pay additional national insurance on behalf of every individual they employ earning over a certain amount, as well as contributing an additional amount towards each person’s pension.
9. What Information Should Be On a Payslip
Payslips must show certain information by law so that it is clear to the individual exactly what they have been paid and the payslip deductions made. A payslip must show:
- earnings before tax and deductions;
- details of deductions made including amount and details of what was made eg: pension of season ticket loan;
- hours worked, if you are paid according to time worked.
10. Should You Keep Your Payslip
Payslips are a legal document that tells individuals how much they have been paid so act as evidence of income for things like loans and mortgages. Lenders can ask for evidence of earnings for anything up to 6 months of payslips so it’s a good idea to keep hold of your payslips.
- Employment section with details of your employer, gross income and tax deducted
- Self-employment section with details about your business, turnover & expenses
You can also find the details you’ll need about your employment income on your P60.
11. Self-Employed Payslips
When you are self-employed you will not receive a payslip because you are not employed by someone under the rules of PAYE. Instead, you declare your earnings once a year using a self-assessment tax return form, once completed and accepted by HMRC this will act as proof of income, along with your SA302. You’ll need to provide evidence of your income depending on who is asking.
Taxes are changing! From April 2024 sole traders will need to report their earnings and pay tax on a quarterly basis. This is known as Making Tax Digital, which you can read more about in this guide to help you get prepared.