Work, pay & self-employment
Your income is the single biggest financial lever you have. Understanding what's actually in your payslip, what HMRC expects from side income, and what the rules are when work changes — all of it adds up to keeping more of what you earn.
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Reading a UK payslip
By law, every employer must give you an itemised payslip showing gross pay, deductions and net pay. The deductions that actually matter:
- Income Tax
Taken via PAYE using your tax code. The standard code for 2025/26 is 1257L (£12,570 personal allowance). Above that: 20% basic rate to £50,270, 40% higher rate to £125,140, 45% additional rate beyond.
- National Insurance (Class 1)
8% on earnings between £12,570 and £50,270, 2% above that. NICs count towards your State Pension and contributory benefits, so the contribution record matters even when the amount feels small.
- Pension contributions
If you're auto-enrolled, you pay at least 5% of qualifying earnings and your employer adds at least 3%. You usually get income tax relief on your share — meaning a £100 pension contribution costs a basic-rate taxpayer £80.
- Student loan repayments
Plan 1, 2, 4, 5 and Postgraduate Loans each have different thresholds. Plan 2 (most post-2012 students) is 9% of earnings over £28,470. Plan 5 (post-2023 starters) is 9% over £25,000 and runs for up to 40 years.
Check your tax code
A wrong tax code is the most common reason people overpay or underpay tax. Log in to your Personal Tax Account on gov.uk to see your current code and what HMRC thinks you earn. Wrong by £1,000 of allowance? That's £200 a year extra tax for a basic-rate payer.
Common codes: 1257L (standard), BR (all income at basic rate — usually a second job), 0T (no allowance — often used for new starters before HMRC catches up), K (negative allowance, used when underpayments are being collected).
Side income and the trading allowance
You can earn up to £1,000 of trading income (self-employment, freelance work, selling online) and £1,000 of property income (excluding rent-a-room) per tax year without telling HMRC. Above those thresholds you'll usually need to register for Self Assessment.
The Rent a Room Scheme separately allows up to £7,500/year tax-free for letting a furnished room in your main home. You don't have to opt in — it applies automatically.
Going self-employed
Register as self-employed with HMRC within three months of starting. You'll pay tax once a year via Self Assessment, with payments on account (advance payments towards next year's bill) due in January and July.
- Set aside 25–30%
A rough rule for basic-rate self-employed earnings: put aside roughly a third of every invoice for tax, NICs and an emergency fund. A separate savings account stops it being spent.
- Class 2 and Class 4 NICs
Class 2 (£3.45/week) was effectively removed from April 2024 — most self-employed people no longer pay it but still get the NI credit. Class 4 is 6% on profits between £12,570 and £50,270, then 2% above.
- Allowable expenses
You can deduct genuine business costs from profit before tax: travel, equipment, a proportion of home utility bills if working from home, software subscriptions, professional fees. Keep digital receipts.
- Making Tax Digital
From April 2026, sole traders and landlords with income over £50,000 must keep digital records and submit quarterly updates through MTD-compatible software. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028.
Redundancy
Statutory redundancy pay (after 2 years' service) is based on age and length of service: half a week's pay per year under 22, a week per year between 22–40, and a week and a half per year over 41. The weekly cap is £719 (April 2024 rate), and total length of service is capped at 20 years.
Statutory redundancy pay is tax-free up to £30,000. Anything above that (including ex-gratia payments) is taxable as earnings. Untaken holiday is paid separately and is fully taxable.
Sickness, parental and other statutory pay
Statutory Sick Pay (SSP) is £118.75/week (2025/26) for up to 28 weeks, after you've been off for 4 consecutive days. Employers can pay more under contract. If SSP isn't enough, check whether you qualify for New Style ESA or the disability element of Universal Credit.
Salary sacrifice — the legal tax break most employees ignore
Salary sacrifice lets you give up part of your gross salary in exchange for a non-cash benefit — most commonly extra pension contributions, but also cycle-to-work, electric car schemes, ultra-low-emission vehicle leases or workplace childcare. You save income tax and the employee 8%/2% NICs on the sacrificed amount, and most employers pass on at least part of their saved 13.8% employer NI as a bigger contribution.
For a higher-rate taxpayer, £1,000 of pension salary sacrifice can produce £1,138 in your pension at a cost of about £580 of take-home pay. The catches: it reduces your gross salary for mortgage applications, life cover based on salary, and some statutory benefits — always run the impact before opting in.
Employment status: employee, worker or self-employed
These three categories carry very different rights and tax treatments. 'Employee' gets the full set: holiday pay, sick pay, redundancy, unfair dismissal rights, auto-enrolment pension. 'Worker' gets the basics: minimum wage, paid holiday, rest breaks, but not redundancy or unfair dismissal. 'Self-employed' gets none of these — you set your own terms but bear all the risk.
Status is determined by reality, not labels. If you have one client, fixed hours, your tools provided, no right to substitute and no real risk — HMRC may treat you as a disguised employee under IR35. Get a free check at gov.uk's CEST tool and consider a contract review if you're a long-term contractor.
Pension salary sacrifice and the workplace pension upgrade
Most workplace pensions accept salary sacrifice contributions. If yours doesn't, ask payroll — it's a free win for both you and the employer (they save the NI too). Many employers will pass that saving on as a matching contribution increase if you ask.
If you're a higher- or additional-rate taxpayer with a 'relief at source' workplace pension, you must also claim the extra tax relief through Self Assessment or by writing to HMRC — your employer only adds basic-rate relief. Many people leave this money on the table for years.
Workplace rights when you leave (or are pushed)
Notice periods are set by your contract but the legal minimum is 1 week after 1 month's service, then 1 extra week per full year up to a max of 12. You're entitled to all accrued but untaken holiday. If you're made redundant after 2+ years, you must be consulted, considered for alternative roles, and paid Statutory Redundancy Pay (capped weekly amount × years served, with multipliers by age).
Settlement agreements are common — they pay extra in exchange for waiving the right to sue. They're only legally valid if you've had advice from a qualified adviser; most employers pay £350–£600 toward that advice. ACAS (0300 123 1100) is free and impartial.
Go deeper on work, pay
Side hustle tax: when you have to tell HMRC
Headlines about a 'side hustle tax' caused a lot of worry, but the underlying rules have not changed. What changed is that platforms like Vinted, eBay, Etsy and Airbnb now share seller data with HMRC. This guide explains when a side income is actually taxable and what the £1,000 trading allowance covers.
Read the explainer →Statutory redundancy rights and pay — your legal minimum
If you are made redundant after 2 years of continuous service, you are entitled to a statutory redundancy payment, a notice period, time off to look for work and (in larger redundancies) a consultation period. Many employers go further than the legal minimum.
Read the explainer →Statutory maternity, paternity and shared parental pay — what each one pays
Four statutory schemes give parents paid time off after a child arrives: Statutory Maternity Pay, Statutory Paternity Pay, Statutory Adoption Pay and Shared Parental Pay. All cap at the same £187.18 weekly standard rate (2025/26).
Read the explainer →Self-employment basics: Self Assessment, NI and Making Tax Digital
When you start working for yourself you become responsible for telling HMRC, completing a Self Assessment return each year, and paying Income Tax and National Insurance on your profits. From April 2026, Making Tax Digital for Income Tax adds quarterly reporting for higher-earning sole traders and landlords.
Read the explainer →UK tax codes explained: 1257L, BR, K codes and emergency tax
Your tax code tells your employer or pension provider how much Income Tax to deduct through PAYE. Get the wrong one and you over- or under-pay tax all year. This guide decodes the letters and numbers and shows what to do if your code looks wrong.
Read the explainer →Statutory Sick Pay (SSP): rates, eligibility and how it is paid
Statutory Sick Pay is the minimum amount your employer must pay if you are off sick for four or more days in a row. It is a floor, not a cap — many employers pay more under their own contractual sick pay schemes. This guide covers the eligibility test, the current rate, the three 'waiting days', and what to do if you don't qualify.
Read the explainer →Holiday pay and entitlement: rolled-up pay, irregular hours and the 5.6 weeks
Every UK worker — including most agency workers, zero-hours workers and casual staff — is entitled to a minimum of 5.6 weeks of paid leave a year, capped at 28 days. The trickier questions are how that translates into hours and pounds when work is irregular, what counts as 'a week's pay', and when 'rolled-up' holiday pay is allowed. This guide pulls together the current UK rules including the changes that took effect in April 2024.
Read the explainer →
Common questions
- Do I need to file Self Assessment for a small side hustle?
- Only if you earn more than £1,000 in a tax year (the trading allowance). Below that, you don't need to register or report. Above it, you'll usually need to register for Self Assessment by 5 October following the tax year in which you crossed the threshold.
- I think my tax code is wrong — what do I do?
- Log in to your Personal Tax Account on gov.uk and check the breakdown. If something looks wrong (e.g. a benefit you no longer get is reducing your allowance), update it online or call HMRC on 0300 200 3300. Overpayments are refunded in your next payslip or by cheque after year-end.
- Should I opt out of my workplace pension?
- Almost never. Opting out forfeits the employer contribution (which is genuinely free money) and the income tax relief. The exception is severe short-term cash flow problems — and even then, opt back in as soon as you can. Auto-enrolment will re-enrol you every three years anyway.
- What's IR35 and does it apply to me?
- IR35 is HMRC's rules for taxing contractors who are working like employees of their client. Since 2021, in most medium-large private sector engagements, the client (not the contractor) decides your status. If you're 'inside IR35', tax and NICs are deducted before you're paid, the same as an employee.
- Can my employer change my contract without my agreement?
- Not usually — material terms (pay, hours, location, role) need your agreement. Employers can impose changes via 'fire and rehire' but the rules tightened with a statutory Code of Practice in force from 2024. If you face unilateral change, get free advice from ACAS or your union before signing anything.
- Should I take a company car or take cash instead?
- For petrol and diesel cars, take the cash — company car tax (Benefit-in-Kind) is high on internal combustion engines and rising. For pure EVs, the BIK rate is 3% (2025/26), rising 1% per year to 7% by 2028/29 — making EV salary sacrifice the most tax-efficient way most employees can get a new car. Hybrids land in the middle; the actual tax depends on CO2 and electric-only range.
- How does Making Tax Digital affect me?
- If you're self-employed or a landlord with combined income above £50,000 (from April 2026), £30,000 (April 2027) or £20,000 (April 2028), you'll need to keep digital records and send quarterly updates to HMRC via approved software. Plan ahead — even free options (e.g. FreeAgent included with NatWest/RBS business accounts, or HMRC's basic tools) need setup time.
- What happens to unused pension contribution allowance?
- You can 'carry forward' unused Annual Allowance from the previous 3 tax years — but only if you were a member of a registered UK pension scheme in those years and used up the current year's £60,000 first. Useful in big-bonus years or for catching up after a career break.