Understanding Tax Calculations
How PAYE tax, National Insurance, student loans and pensions are calculated
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
- Your tax code determines your annual tax-free allowance (e.g. 1257L = £12,570)
- Each period, the system calculates: cumulative taxable pay − cumulative free pay = cumulative taxable amount
- Tax bands are applied to the cumulative taxable amount
- 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.