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)

How Cumulative Tax Works

1. Your tax code determines the tax-free pay for each period, worked out as HMRC's tax tables do: 1257L is £12,579 a year (the code × 10, plus 9), which is £1,048.26 a month or £241.92 a week
2. Each period, the system calculates: cumulative taxable pay − cumulative free pay = cumulative taxable amount, rounded down to the whole pound
3. Tax bands are applied to the cumulative taxable amount, and the tax due is rounded down to the penny
4. This period's tax = cumulative tax due − tax already deducted in previous periods. If that is negative - after a new code with a bigger allowance, or when pay drops - the difference is refunded with this pay and the payslip shows PAYE Tax refund. A Week 1 / Month 1 code never refunds

This ensures that if an employee's pay varies, they pay the correct total tax across the year. Because tax is worked out on whole pounds, a steady salary can see its tax move by a few pence from one month to the next; that is how HMRC's own tables behave.

Company Cars Taxed Through Payroll

When a company car is recorded against an employee as a payrolled benefit, its cash equivalent is added to their taxable pay in equal parts over the paydays on which they have the car, and the FPS reports it in taxable pay together with the car's details. It is not money paid to the employee: it does not change gross pay, National Insurance, student loan or pension deductions, or net pay, and the payslip shows it as Payrolled benefits (taxed, not paid).

To payroll a car, open the employee, go to the Payroll tab and click Car under Company Cars (payrolled). Pick the vehicle (add it under Assets → Vehicles first if it is not there), then fill in what HMRC need about the car - first registered, list price, CO2, zero-emission mileage for a car emitting 1 to 50 g/km, and the HMRC fuel type, which are saved on the vehicle - and the benefit itself: available from, available to (left empty while the employee still has the car), the cash equivalent for the tax year, and free fuel if you pay for private fuel. dynamik.app does not work out the cash equivalent for you: enter the figure for the year, reduced for any days the car was not available. A car held since an earlier tax year is reported to HMRC as available from the first day of the current one.

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)
• SBR, SD0, SD1, SD2, SD3 — Scottish flat codes: 20%, 21%, 42%, 45% and 48% on all pay
• 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)

Employer NI

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:

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.