You have landed your first proper job. The salary sounded decent when you accepted the offer. Then payday arrives, you open your payslip, and the number at the bottom is noticeably less than you expected. Where did the rest go?
This is one of those moments that nobody prepares you for. Schools do not teach it. Universities do not cover it. Your employer assumes you already understand it. And yet your payslip is the single most important financial document you will receive on a regular basis. It tells you exactly how much you earned, how much was taken, and where every penny went.
Here is how to read it.
Gross Pay vs Net Pay
The first thing to understand is that these are two very different numbers, and the gap between them catches almost everyone off guard.
Gross pay is the total amount you have earned before anything is deducted. If your annual salary is £28,000 and you are paid monthly, your gross pay each month is £2,333.33 (£28,000 ÷ 12).
Net pay (sometimes called “take-home pay”) is what actually lands in your bank account after all the deductions have been removed. On a £28,000 salary, your monthly net pay will be somewhere around £1,898, depending on your pension contributions and student loan status. That is roughly 81% of your gross figure.
The gap is not a mistake and it is not your employer keeping money back. It is the combined effect of income tax, National Insurance, pension contributions, and potentially student loan repayments, all of which are deducted automatically through a system called PAYE (Pay As You Earn).
Your Tax Code
Somewhere on your payslip you will see a tax code, most likely 1257L if you have one job and no complications. This code tells your employer how much of your income is tax-free.
The numbers in your tax code represent your tax-free Personal Allowance. 1257L means you can earn £12,570 per year before paying any income tax. Your employer spreads this allowance across the year, so each month you get roughly £1,048 of tax-free income (£12,570 ÷ 12).
The “L” at the end simply means you are entitled to the standard Personal Allowance. You might occasionally see different letters:
BR: all your income from this job is taxed at the basic rate (20%). This usually applies if you have a second job.
0T: no Personal Allowance is being applied. This can happen temporarily if your employer does not have your tax details yet.
W1 or M1: an “emergency” tax code, meaning you are being taxed on each pay period in isolation rather than cumulatively. This usually sorts itself out within a few months once HMRC has your details.
If your tax code looks wrong, do not just hope it will fix itself. Check it against your Personal Tax Account on the HMRC website (gov.uk/personal-tax-account). An incorrect tax code means you could be paying too much or too little tax all year.
Income Tax
Income tax is calculated on your earnings above the Personal Allowance. For the 2025/26 tax year:
Personal Allowance: £0 to £12,570 — no tax
Basic rate: £12,571 to £50,270 — taxed at 20%
Higher rate: £50,271 to £125,140 — taxed at 40%
Additional rate: above £125,140 — taxed at 45%
If you are on £28,000, your taxable income is £15,430 (£28,000 minus £12,570). All of that falls within the basic rate band, so your annual income tax is £3,086 (£15,430 × 20%), which works out at about £257 per month.
A common misunderstanding is that moving into a higher tax band means all your income gets taxed at the higher rate. It does not. Only the portion above the threshold is taxed at the higher rate. If you earn £55,000, you pay 20% on the first £37,700 of taxable income and 40% only on the £4,730 above £50,270. You will never take home less by earning more (ignoring student loan thresholds, which work differently).
National Insurance
National Insurance Contributions (NICs) are the other big deduction. You start paying them when you earn more than £242 per week (£12,570 per year for the 2025/26 tax year).
The rate for employees is 8% on earnings between £242 and £967 per week, and 2% on anything above that.
On a £28,000 salary, your annual NI bill is roughly £1,234, or about £103 per month.
A common myth is that National Insurance directly funds the NHS. It does not, at least not in the ring-fenced way most people imagine. NICs go into a general fund that contributes to the State Pension, certain benefits, and yes, some NHS funding, but the link is not as direct as the name implies. Your NICs do, however, build up your entitlement to the State Pension. You need 35 qualifying years of contributions for the full amount, so it is worth keeping track through your Personal Tax Account.
Pension Contributions
If you are aged 22 or over and earn at least £10,000 per year, your employer is legally required to auto-enrol you into a workplace pension. The standard minimum contributions are:
Your contribution: 5% of qualifying earnings (4% from your pay, plus 1% tax relief)
Employer contribution: 3% of qualifying earnings
“Qualifying earnings” means the portion of your salary between £6,240 and £50,270. On a £28,000 salary, your qualifying earnings are £21,760, so your monthly pension deduction is roughly £72.
This is money you do not see in your bank account, but it is absolutely working for you. Your employer’s 3% contribution is free money: declining it by opting out of the pension is the equivalent of asking your employer to pay you less. I cover pensions and the power of starting early in much more detail in the Money Sorted book and the Time — The Money Superpower eBook, but the short version is: do not opt out.
Student Loan Repayments
If you have a student loan, repayments are deducted through your payslip once you earn above the threshold:
Plan 2 (started university between September 2012 and July 2023): 9% of earnings above £28,470 per year
Plan 5 (started university from September 2023): 9% of earnings above £25,000 per year
On a £28,000 salary with a Plan 5 loan, you would repay 9% of £3,000 (the amount above the £25,000 threshold), which is £270 per year, or £22.50 per month. On Plan 2, you would be below the threshold and repay nothing.
Student loan repayments function more like a graduate tax than a traditional debt. They come out of your pay automatically, they stop if your income drops below the threshold, and any remaining balance is written off after 30 years (Plan 2) or 40 years (Plan 5). They do not affect your credit score and no debt collector will ever come knocking. The Student Loans article on the Money Sorted website goes into much more detail on whether early repayment makes financial sense (spoiler: for most people, it does not).
Other Deductions
Depending on your employer, you might also see deductions for:
Salary sacrifice schemes: such as cycle-to-work, additional pension contributions, or childcare vouchers. These come out of your gross pay (before tax), which means you save tax and NI on the amount.
Union fees: if you have joined a trade union.
Company benefits: such as private health insurance, if provided and taxable.
Putting It All Together
Here is what a payslip might look like for someone earning £28,000 per year with a Plan 5 student loan and standard pension contributions:
That gap between £2,333 and £1,879 is about £455 per month, or roughly 19.5% of your gross pay. On a £28,000 salary, for every £1 you earn, about 80p ends up in your pocket.
As your salary rises, that percentage shifts because more of your income falls into higher tax bands and above student loan thresholds. On £40,000, the effective deduction rate climbs to about 24%, leaving you with roughly 76p of every pound earned.
What To Do With This Information
Check your payslip every month. Not just the bottom line. Look at the tax code, check the deductions, and make sure the gross figure matches what you expect. Errors happen and HMRC does not always catch them quickly.
Keep your P60. Your employer will give you a P60 at the end of each tax year (April). It summarises your total earnings and deductions for the year. Keep a digital copy. You will need it for tax returns, mortgage applications, and proof of income.
Understand what you are actually earning. When someone offers you a job at £30,000, you now know that your monthly take-home will be roughly £1,978 (depending on pension and loan status), not £2,500. Build your budget from net pay, not gross.
Your payslip is not trying to confuse you. It just contains a lot of information in a small space, and nobody bothers to explain it. Now you know what every line means, and that puts you ahead of a surprisingly large number of people who have been working for decades.
This article is part of the Money Sorted series on moneysorted.money. For more on tax, pensions, and managing your income, explore the full range of articles, courses, and eBooks.