Basics of Taxes and Deductions

Peaches James
6 days ago
3 min read

Updated: 5 days ago

Right — payslips, tax codes and all those little deductions can feel like another language.

You see your wage, then you see what hits your bank and you’re like: Where did it go?

This chapter breaks it down without the waffle.

What Is Income Tax?

If you earn money, the government takes a portion, that’s income tax.

The more you earn, the higher the percentage.

Most people pay tax through PAYE — “Pay As You Earn.”

Your employer takes it out before the money hits your account.

If you’re self-employed or have multiple income streams, you might use Self-Assessment, where you report your earnings and pay your tax directly.

Key thing to know:

You don’t pay tax on everything.

You get a personal allowance — currently £12,570 per year.

You only pay tax on what you earn above that.

Understanding Tax Bands

Here’s how income tax is usually split in England (as of now):

£0–£12,570 – No tax (personal allowance)
£12,571–£50,270 – 20% tax (basic rate)
£50,271–£125,140 – 40% tax (higher rate)
£125,140+ – 45% tax (additional rate)

Most people fall in that 20% bracket.

You’ll only pay the higher rates on the bit that tips into that bracket — not your whole income.

Think of It Like Steps on a Staircase

(With Real Numbers)

Let's breakdown the analogy for those still unsure.

Your income is like a staircase — and tax is only charged after certain steps.

Let’s say you earn £20,000 a year.

The first £12,570?

That part is tax-free.

That’s your personal allowance — no tax taken at all.

The money you earn above £12,570 — which is £7,430 — is the only bit that gets taxed.

That £7,430 falls into the basic tax band, which is taxed at 20%.

So instead of paying 20% on the whole £20,000, you're only paying 20% on £7,430.

That works out to £1,486 in income tax.

You keep most of what you earn.

Tax isn’t taken from your full salary — just the bit above each threshold.

What’s National Insurance?

It’s not insurance you buy — it’s a contribution to the system.

You pay it to qualify for things like:

State pension
Maternity allowance
Certain benefits
Statutory sick pay

If you’re employed, it comes out automatically.

If you’re self-employed, you pay it when you do your tax return.

Different types of NI (called “classes”) apply depending on how you work — but the main thing is: it’s your stamp that counts towards future support.

Quick Note

If you’re wondering how things like Universal Credit, long-term illness or parenting affect your National Insurance contributions, don’t worry — we’ll break all that down in the next chapter.

It’s important and a lot of people don’t realise how it works, so we’ll explain it clearly.

What About Deductions?

Apart from tax and NI, your payslip might show things like:

Pension contributions
Student loan repayments
Union fees
Workplace benefits (like gym memberships or season ticket loans)

It can feel like money’s being snatched left, right and centre but understanding what’s coming out and why gives you back control.

Allowances, Tax Codes and Keeping More of Your Pay

Personal allowance: Everyone gets this tax-free chunk
Marriage allowance: If you're married and one earns less, you might be able to transfer part of the allowance
Work-related expenses: Uniform, tools or mileage? You might be able to claim some of that back
Tax codes: They tell your employer how much tax to take. If yours looks off (e.g. 0T or BR), get it checked. Mistakes happen.