PAYE Tax for Employers: Rates, Thresholds and Common Errors

PAYE rates and thresholds affect how much tax and National Insurance you deduct from employee pay and how much your business may need to pay to HMRC.

Using the wrong rate or threshold can lead to incorrect payslips, underpayments, overpayments and problems with HMRC. That is why employers need to understand which figures apply, when they change and who they apply to.

This guide explains the main PAYE rates and thresholds for employers, including Income Tax, National Insurance, statutory payments, Student Loans and other payroll figures. It also covers common mistakes and how to avoid them.

For a general introduction first, see Factorial’s PAYE for employers guide.

What do PAYE rates and thresholds mean?

A rate is the percentage you use to calculate a tax or contribution.

A threshold is the earnings level at which a rule starts or changes.

For example, an employee does not usually pay standard employee National Insurance on their first £12,570 of annual earnings in 2026/27. Above that threshold, a standard category A employee normally pays 8%, until another threshold is reached, according to GOV.UK.

Different thresholds apply to:

• Income Tax
• employee National Insurance
• employer National Insurance
• Student Loan repayments
• statutory payments
• minimum wages
• some employer allowances and levies

PAYE brings several payroll calculations together.

If you are new to payroll, Factorial’s payroll explained guide covers the basic process. Our PAYE registration guide explains when and how employers need to register.

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PAYE rates and thresholds for 2026/27 at a glance

Here are some of the main figures employers should know:

Most of these figures apply from 6 April 2026 to 5 April 2027, although National Minimum Wage rates apply from 1 April 2026 and some other rates have their own effective dates. Check GOV.UK for more information. Another important thing you should read explains PAYE late payment penalties and what can happen if you miss deadlines.

Income Tax rates and Personal Allowance

The amount of Income Tax you deduct depends mainly on:

• the employee’s taxable pay
• their tax code
• the tax rates that apply where they are a taxpayer

The Personal Allowance is the amount of income a person can normally receive before paying Income Tax.

For 2026/27, the standard Personal Allowance is:

• £242 per week
• £1,048 per month
• £12,570 per year

An employee’s actual allowance can be different, which is why you should use their tax code rather than simply assuming everyone receives £12,570 tax-free.

Our article on tax codes explains how these codes work.

England and Northern Ireland Income Tax rates

For 2026/27:

For someone receiving the full standard Personal Allowance, this normally means the 40% rate starts once total income moves above £50,270.

An important point is that higher earners do not pay the higher rate on all of their income. Each rate only applies to the part of their taxable income that falls within that band.

Wales Income Tax rates

The 2026/27 rates shown in HMRC’s employer table for Wales are:

The standard Personal Allowance is also £12,570.

Scotland Income Tax rates

Scotland uses different Income Tax bands. Scottish taxpayers have a tax code beginning with S.

For 2026/27:

The standard Personal Allowance remains £12,570.

Emergency tax codes

For 2026/27, HMRC lists these emergency tax codes:

• 1257L W1
• 1257L M1
• 1257L X

An emergency tax code is used when HMRC or the employer does not yet have enough information to apply the employee’s normal tax position.

W1 means “week 1”, while M1 means “month 1”. In simple terms, payroll calculates tax using the current pay period without fully taking previous pay and tax from the year into account.

One common payroll error is leaving someone on an emergency code after HMRC has provided a replacement.

Read our guide on how to calculate UK payslips. It explains how the main figures fit together. For employees who need help understanding the result, see payslip explained. You can also use Factorial’s employee payslip template.

Save time for your HR team with this Excel payslip template.

A standard payroll model made in Excel based on the HMRC template that you can use to prepare your employees' payroll.

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National Insurance thresholds for employers

National Insurance uses different earnings thresholds from Income Tax.

It is important to understand them because there is one threshold for employee National Insurance and another for employer National Insurance.

Class 1 National Insurance thresholds for 2026/27

Those names can be a bit technical and difficult to grasp, so here is what they actually mean.

Lower Earnings Limit

The Lower Earnings Limit, or LEL, is £129 per week in 2026/27.

It is an important National Insurance threshold even though employees do not normally start paying NI at this point.

Primary Threshold

The Primary Threshold is where a standard employee starts paying employee National Insurance.

For 2026/27, it is £242 per week, £1,048 per month or £12,570 per year.

Secondary Threshold

The Secondary Threshold is where the employer normally starts paying employer National Insurance.

It is much lower:

£96 per week, £417 per month or £5,000 per year.

This difference is easy to miss.

An employee may earn too little to pay employee NI themselves while their employer still has an employer NI bill.

Upper Earnings Limit

The Upper Earnings Limit is £50,270 per year.

For a standard category A employee, the employee NI rate falls from 8% to 2% on earnings above this level.

Special employer NI thresholds

Employers can receive National Insurance relief for some groups of employees.

There are separate upper secondary thresholds for:

• qualifying Freeport employees
• qualifying Investment Zone employees
• employees under 21
• apprentices under 25
• qualifying veterans

These thresholds affect employer National Insurance, rather than changing the employee’s normal gross salary.

Employee National Insurance rates

Employee National Insurance is also called a primary contribution.

You deduct it from the employee’s pay.

For most employees, category A applies. HMRC uses other category letters where special rules apply.

Here is a simpler way to understand the 2026/27 rates:

There is normally a 0% employee contribution rate between the Lower Earnings Limit and Primary Threshold for categories where employee NI applies.

You should not choose a National Insurance category based only on someone’s age or job title. Make sure the employee actually meets the relevant conditions.

Employer National Insurance rates

Employer National Insurance is called a secondary contribution.

Unlike employee NI, you do not deduct this from the employee’s wages. It is an extra cost paid by your business.

For most employees, the 2026/27 employer NI rate is 15% on earnings above the £5,000 annual Secondary Threshold. However, some categories receive employer NI relief.

Standard categories

For categories A, B, C and J, the employer generally pays:

15% above the Secondary Threshold.

For example, category C employees do not personally pay employee NI because they are over State Pension age, but their employer can still have employer National Insurance to pay.

Freeport and Investment Zone categories

For categories D, E, F, I, K, L, N and S, the employer rate can be 0% up to the relevant £25,000 Freeport or Investment Zone Upper Secondary Threshold, with the standard employer rate applying above it.

The employee must meet the conditions for the relevant relief.

Employees under 21, apprentices and veterans

Categories H, M, V and Z can give employers a 0% employer NI rate up to the relevant £50,270 Upper Secondary Threshold.

Above that level, the standard 15% employer rate applies.

A common error is assuming that these workers are completely exempt from National Insurance. They are not. The relief mainly changes what the employer pays and only applies up to the relevant threshold.

What about directors?

The same National Insurance rates also apply to directors.

However, directors have special rules for how their NI is calculated, so when conducting payroll, do not simply treat every director exactly like a normal employee without checking the payroll method being used.

Class 1A and Class 1B National Insurance

Class 1 National Insurance is not the only type employers may see.

Class 1A: employee benefits and expenses

Employers can have to pay Class 1A National Insurance on taxable benefits and expenses provided to employees.

The 2026/27 rate is:

15%

Class 1A on normal taxable expenses and benefits is generally reported and paid as part of the year-end benefits process.

Class 1A: termination payments

Class 1A National Insurance can also apply to the taxable part of certain termination awards.

For 2026/27, the rate is 15% on the relevant amount above £30,000.

It can also apply to sporting testimonial payments by independent committees above £100,000. These payments are handled through payroll during the tax year.

Class 1B and PAYE Settlement Agreements

A PAYE Settlement Agreement, or PSA, allows an employer to make one annual payment covering tax and National Insurance on certain small or irregular employee expenses and benefits.

The 2026/27 Class 1B NI rate is 15%.

The main mistake here is assuming every employee benefit is simply handled through normal Class 1 National Insurance. Different types of benefits can have different reporting rules.

National Minimum Wage rates

The National Minimum Wage is not a PAYE tax, but employers need to consider it when processing wages.

The rates from 1 April 2026 are:

An apprentice aged 19 or over who has completed their first year will normally move onto the minimum wage rate for their age.

Do not confuse minimum wage with the tax-free allowance. An employee can be paid the correct minimum wage but still have Income Tax or National Insurance deductions depending on their total earnings.

Statutory maternity, paternity and other family pay rates

Several statutory payments also run through payroll.

For 2026/27:

The employee’s average weekly earnings are used to decide whether they qualify and, in some cases, how much they receive.

One common mistake is automatically paying £194.32. If 90% of the employee’s average weekly earnings is lower, you pay the lower amount.

How much can employers recover?

You can recover some statutory family payments from HMRC.

For 2026/27:

• 92% can generally be recovered if your total Class 1 National Insurance for the previous tax year was above £45,000.
• 109% can generally be recovered if it was £45,000 or less.

This covers qualifying maternity, paternity, adoption, shared parental, parental bereavement and neonatal care pay. It does not include Statutory Sick Pay.

Statutory Sick Pay rates

Statutory Sick Pay changed significantly from 6 April 2026.

For sickness absences starting under the new rules, SSP is:

£123.25 per week or 80% of the employee’s average weekly earnings, whichever is lower.

It is now payable from the first full day of sickness, and the previous minimum earnings requirement has been removed, which you can read about on GOV.UK.

The employee’s daily rate depends on how many qualifying days they normally work. A qualifying day simply means a day that normally counts as a working day for SSP purposes.

If the £123.25 maximum weekly rate applies, HMRC’s unrounded daily figures are:

If 80% of the employee’s average weekly earnings is less than £123.25, you use the lower weekly amount when calculating their SSP.

For more examples, see Factorial’s guide on how to calculate Statutory Sick Pay.

Student Loan and Postgraduate Loan thresholds

You may also need to deduct Student Loan or Postgraduate Loan repayments through PAYE.

The amount depends on which repayment plan HMRC tells you to use.

Student Loan thresholds for 2026/27

The Student Loan deduction rate is 9%.

This does not mean deducting 9% of the employee’s entire salary. The repayment is calculated on relevant earnings above the threshold for their plan.

Postgraduate Loan threshold

For 2026/27:

• annual threshold: £21,000
• monthly threshold: £1,750
• weekly threshold: £403.84
• deduction rate: 6%

An employee can sometimes have both a Student Loan and a Postgraduate Loan deduction.

A common error is using the wrong repayment plan. Use the information supplied through the employee’s starter details or HMRC instructions rather than guessing based on when they went to university.

Company car advisory fuel rates

If employees use a company car for business travel, HMRC’s advisory fuel rates can be used to work out fuel reimbursements.

These rates change during the year. The rates applying from 1 September 2026 are:

Petrol and LPG company cars

Diesel company cars

Hybrid cars are treated as petrol or diesel cars for these rates.

Fully electric company cars

From 1 September 2026, HMRC’s advisory electricity rates are:

• 7p per mile when charged at home
• 15p per mile when charged using a public charger

HMRC also makes clear that electricity is not treated as fuel for car fuel benefit purposes.

Because advisory fuel rates can change more often than annual PAYE thresholds, check the latest rate rather than copying last year’s figure into your expenses policy.

Mileage rates when employees use their own vehicle

Do not confuse company car advisory fuel rates with mileage allowance payments.

Mileage allowance payments apply when an employee uses their own vehicle for business travel.

For 2026/27:

For National Insurance purposes, HMRC’s approved car mileage amount is 55p for all business miles.

You can pay up to the approved amount without normally having to report the mileage payment as taxable pay.

A very common mistake is using the company car fuel rate for an employee who is actually driving their own car. These are two separate sets of rates.

Employment Allowance

The Employment Allowance can reduce the amount of employer National Insurance an eligible business has to pay.

For 2026/27, the allowance is:

Up to £10,500 per year.

It reduces the employer NI liability rather than changing what employees themselves pay.

Not every employer qualifies, so do not simply remove £10,500 from your NI bill without checking eligibility.

Apprenticeship Levy

The Apprenticeship Levy mainly affects larger employers.

Employers and connected companies with an annual pay bill of more than £3 million can be liable for it.

For 2026/27:

• Levy rate: 0.5%
• Annual levy allowance: £15,000

The allowance reduces the amount that has to be paid.

If companies are connected, there are additional rules about how the allowance is allocated, so businesses should not automatically assume every company in a group receives a separate £15,000 allowance.

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Payroll software can calculate tax, but the calculation is only as accurate as the information behind it. A pay rise, bonus, absence, expense or change in employee details can all affect payroll.

Factorial is an AI business management platform that helps businesses bring employee information, payroll preparation, time management and finance processes together. Its payroll preparation tools can centralise payroll data and help teams spot missing or incorrect compensation information before payroll is completed. Request a free demo today to see how Factorial works and receive a personalised quote tailored to your organisation!