## Understanding Tax Calculations dynamik.app calculates UK payroll taxes automatically using HMRC's 2025-26 tax year rates and thresholds. ### PAYE Income Tax (Cumulative Method) Tax is calculated cumulatively, meaning each pay period considers the total tax-free allowance and tax paid so far in the tax year. **Tax Bands (2025-26):** | Band | Rate | Annual Range | |------|------|-------------| | Personal Allowance | 0% | Up to £12,570 | | Basic Rate | 20% | £12,571 - £50,270 | | Higher Rate | 40% | £50,271 - £125,140 | | Additional Rate | 45% | Over £125,140 | **How cumulative tax works:** 1. Your tax code determines your annual tax-free allowance (e.g. 1257L = £12,570) 2. Each period, the system calculates: cumulative taxable pay - cumulative free pay = cumulative taxable amount 3. Tax bands are applied to the cumulative taxable amount 4. This period's tax = cumulative tax due - tax already deducted in previous periods This ensures that if an employee's pay varies, they pay the correct total tax across the year. **Special Tax Codes:** - **BR** — All pay taxed at 20% (basic rate only, no allowance) - **D0** — All pay taxed at 40% (higher rate) - **D1** — All pay taxed at 45% (additional rate) - **NT** — No tax deducted - **0T** — No personal allowance but all tax bands apply - **K codes** (e.g. K427) — Negative allowance, adds to taxable pay (used when benefits exceed allowance) - **S prefix** (e.g. S1257L) — Scottish tax rates apply ### National Insurance NI is calculated per period (not cumulatively, except for directors). **Employee NI (Category A, 2025-26):** | Earnings Band | Rate | |--------------|------| | Up to £12,570/year (Primary Threshold) | 0% | | £12,570 - £50,270 (Upper Earnings Limit) | 8% | | Above £50,270 | 2% | **Employer NI:** | Earnings Band | Rate | |--------------|------| | Up to £5,000/year (Secondary Threshold) | 0% | | Above £5,000 | 15% | **Special NI Categories:** - **A** — Standard (most employees) - **C** — Over state pension age (no employee NI, employer NI still applies) - **H** — Apprentice under 25 (no employer NI up to £50,270) - **M** — Under 21 (no employer NI up to £50,270) ### Student Loan Deductions Deducted per period at a percentage of earnings above a threshold: | Plan | Threshold (Annual) | Rate | |------|-------------------|------| | Plan 1 | £24,990 | 9% | | Plan 2 | £27,660 | 9% | | Plan 4 (Scotland) | £31,395 | 9% | | Postgraduate | £21,000 | 6% | An employee can have both a student loan plan AND a postgraduate loan deducted simultaneously. ### Pension If an employee is enrolled in a workplace pension: - Employee contribution is deducted from gross pay - Employer contribution is an additional cost - Pension contributions reduce taxable pay (for net-pay pension schemes) The minimum auto-enrolment rates are 5% employee and 3% employer. ### Director Annual Method Company directors' NI can be calculated using the annual method instead of the per-period method. This uses the full annual thresholds and calculates NI on cumulative earnings, which can result in different amounts than the standard method for directors with irregular pay.