Understand Your Payslip, Tax Code and PAYE / Lesson 2 of 8
How gross becomes net
Two colleagues on the same salary, £180 a month apart. Nothing is wrong.
The short answer
- ✓ Salary sacrifice reduces pay before both tax and National Insurance
- ✓ Relief at source gives only basic rate automatically: higher rate must be claimed
- ✓ Taxable pay is gross less pre-tax deductions, not gross
- ✓ Identical salaries can produce very different net pay, legitimately
Order of operations
Deductions are not applied to the same figure. The order decides how much tax you pay, which is why identical salaries can produce different take-home.
GROSS PAY
minus salary sacrifice <- before tax AND National Insurance
minus net-pay pension <- before tax, after NI
= TAXABLE PAY
minus income tax <- per your tax code
minus National Insurance <- on pay before the pension in most schemes
minus student loan <- on gross-ish pay, per period
= NET PAYWhy the pension method matters
| Scheme type | How relief arrives | Higher-rate relief |
|---|---|---|
| Net pay arrangement | Contribution comes off before tax is worked out | Automatic |
| Relief at source | Basic rate added by the provider afterwards | You must claim it |
| Salary sacrifice | Salary is reduced before tax and NI | Automatic, plus NI saved |
Two people on the same salary, one on relief at source and one on salary sacrifice, will show different taxable pay and different NI. Neither is an error.
The bit nobody explains
If your workplace pension uses relief at source and you are a higher-rate taxpayer, part of your relief is not being given to you automatically. The provider adds basic rate; the rest has to be claimed from HMRC. Large numbers of higher-rate employees never do, for years at a time.
Check which method your scheme uses. It is usually stated in your pension paperwork, and the difference is worth real money.
Common mistakes
- Comparing net pay with a colleague. Pension method, code and student loan plan all differ.
- Assuming pension relief is always automatic. Relief at source needs a claim above basic rate.
- Thinking salary sacrifice only saves income tax. It saves National Insurance too.
A £38,000 salary
Where the tax actually comes from
National Insurance, student loan and pension contributions are left out here on purpose, so you can see income tax on its own. The calculator below includes them.
Try it on your own numbers
This is the same calculator as the full tool page, using 2026/27 rates.
Your salary
Take-home pay
per · you keep of your salary
- Gross pay
- Pension
- −
- Income Tax
- −
- National Insurance
- −
- Student loan
- −
- Take-home pay
take-home per working day
effective hourly
On your next £100 of salary you keep - a marginal rate of .
What this means for you
Do this next, in order
Estimates only - not financial or tax advice. Confirm figures on GOV.UK or with an adviser.
Take-home across salaries
Your salary of sits on the curve. Notice the dip where the £100k Personal Allowance taper bites.
| Band | Rate | Taxed amount | Tax |
|---|---|---|---|
| Personal Allowance | 0% | £0 | |
Compare saved scenarios
| Scenario | Gross | Take-home / yr | / month | Kept | |
|---|---|---|---|---|---|
Key takeaways
- ✓ Salary sacrifice reduces pay before both tax and National Insurance
- ✓ Relief at source gives only basic rate automatically: higher rate must be claimed
- ✓ Taxable pay is gross less pre-tax deductions, not gross
- ✓ Identical salaries can produce very different net pay, legitimately
Check you have got it
3 quick questions. No score is kept, and you can change your mind.
1. Your workplace pension uses relief at source and you are a higher-rate taxpayer. What should you do?
2. What does salary sacrifice reduce?
3. A colleague on the same salary takes home more than you. Is something wrong?
Sources
Finished this lesson?
Mark it done and we will remember where you got to.
