Principles of PAYE, NIC and statutory payments
PAYE and tax codes
PAYE collects income tax through the payroll using a tax code. The standard code uses the personal allowance (£12,570): 20% up to £37,700 of taxable pay, 40% to £125,140, then 45%. Suffixes matter: L standard allowance, M marriage allowance received, N transferred away, T other items reviewed by HMRC, K untaxed income exceeding allowances (added to pay), BR flat 20%, D0/D1 flat 40/45%, NT no tax. Cumulative codes give year-to-date allowances; week 1/month 1 codes give only the period allowance - a classic question trap.
National Insurance
Class 1 primary (employee): 8% between £12,570 and £50,270, then 2%. Class 1 secondary (employer): 13.8% above £9,100, reduced by the Employment Allowance (up to £5,000). Class 1A on most benefits is also 13.8%. Directors are assessed on an annual earnings period.
Statutory payments
SSP is £116.75 a week, payable after three waiting days for up to 28 weeks. SMP is 90% of average weekly earnings for six weeks, then £184.03 (or 90% if lower) for 33 weeks. Small employers with NIC of £45,000 or less reclaim 103% of statutory payments; others reclaim 92%. Student loan deductions follow plan thresholds.
Rule of thumb: apply the tax code to taxable pay, then NIC, then student loan, then statutory deductions. A net pay pension reduces pay for tax (and NIC under salary sacrifice); relief at source does not.