National Insurance
PAYE Tax and Class 1 National Insurance Contributions: 2025 Update
Operating Pay As You Earn (PAYE) is a fundamental part of payroll management, ensuring that Income Tax and National Insurance contributions (NICs) are correctly deducted from employees’ pay. This guide provides an overview of the updated thresholds, rates, and key details for the 2025–2026 tax year.
PAYE Tax Rates and Thresholds for England and Northern Ireland (2025-2026)
Personal Allowance (Tax-Free Income):
- Weekly: £242
- Monthly: £1,048
- Annually: £12,570
This allowance is reduced by £1 for every £2 of income above £100,000. For individuals earning over £125,140, the Personal Allowance is completely removed.
Income Tax Rates:
- Basic Rate (20%):
- Applies to annual earnings between £12,571 and £50,270.
- Higher Rate (40%):
- Applies to annual earnings from £50,271 to £125,140.
- Additional Rate (45%):
- Applies to annual earnings exceeding £125,140.
These rates are subject to periodic reviews and potential adjustments by HMRC.
Class 1 National Insurance Contributions (2025-2026)
Employee Contributions:
- 12% on earnings between £1,048 and £4,189 per month.
- 2% on earnings above £4,189 per month.
Employer Contributions:
- 13.8% on earnings above £758 per month.
National Insurance contributions are automatically calculated and deducted via payroll software.
Operating PAYE and Payroll Software
Your payroll software plays a key role in calculating and deducting the correct amounts for both Income Tax and National Insurance contributions. It factors in:
- Employee tax codes.
- Individual thresholds for PAYE and NICs.
- Any adjustments required for changes in employee income or benefits.
Key Points for 2025
- Tax-Free Allowance Adjustment: Ensure high-income employees are aware of reductions in their Personal Allowance as their income rises above £100,000.
- Review Payroll Software: Verify that your payroll system is updated for the 2025–2026 tax thresholds and rates.
- Stay Compliant: Regularly check for updates from HMRC to ensure your business adheres to the latest tax and NIC regulations.
Why Compliance Matters
Accurate PAYE and NIC deductions:
- Prevent HMRC penalties for underpayment or non-compliance.
- Build trust with employees through correct pay processing.
- Streamline financial reporting for your business.