Where does your tax actually go?
You see tax come off your pay every month — but do you actually know what you're paying and where it goes? Here's a simple breakdown that finally makes it make sense.
Most people glance at their payslip, note the take-home number, and move on. The deductions in the middle? Mysterious. Income tax, National Insurance, student loan, pension — it all blurs together into “the bit the government takes.”
But understanding where your money goes isn't just academic. It's the foundation for every financial decision you'll make — from “should I increase my pension?” to “would salary sacrifice save me money?” to “why does my pay rise feel smaller than it should?”
How tax bands actually work
This is the thing almost everyone gets wrong about UK tax: “If I earn over £50,270, I pay 40% on everything.” Nope. Tax bands work like a staircase — you only pay the higher rate on the bit of your income that's above each step. Not on all of it.
Here's how it actually breaks down for 2026/27. The first £12,570 you earn? Tax-free. That's your Personal Allowance — everyone gets it. The next chunk (from £12,571 to £50,270) is taxed at 20%. Only the money you earn above £50,270 gets taxed at 40%. And the 45% rate? That only kicks in above £125,140.
Sam's breakdown · £38,000 salary
Personal Allowance (£0 – £12,570): £0 tax
Basic rate (£12,571 – £38,000): 67% of salary taxed at 20% = £5,086 income tax
Effective tax rate: 13% — not 20%. Because the Personal Allowance shelters the first £12,570.
Where every pound goes
Annual salary breakdown: £38,000
Example based on Sam, 28, Plan 2 student loan, 5% pension contribution
National Insurance — the other tax
National Insurance is basically a second income tax that nobody calls a tax. You pay 8% on what you earn between £12,570 and £50,270, then 2% on anything above that. Your employer also pays 15% on top of your salary (from April 2025, up from 13.8%) — you never see this on your payslip, but it's part of what it costs to employ you.
This is why something called “salary sacrifice” is such a good deal: if your employer offers it, your pension contributions come out of your pay before both income tax and National Insurance are calculated. Normal pension contributions only dodge income tax. Salary sacrifice dodges NI too — that's an extra 8% saving on every pound.
Student loan — the graduate tax
Student loan repayments don't really work like normal debt. Think of them more like a graduate tax. You pay 9% on everything you earn above a threshold — £29,385 for Plan 2 (most people who started uni from 2012 to 2023). It comes straight off your payslip. After 30 years any balance left gets wiped. If you started uni from 2023 onwards you're on Plan 5, which has a higher threshold and a 40-year write-off period — check your student loan statement to confirm your plan.
For Sam on £38,000, that's about £775/year or £65/month. Whether it makes sense to overpay depends on your balance, interest rate, and how long until write-off — for most Plan 2 borrowers, the answer is don't overpay.
The bottom line for Sam: out of every £100 earned, roughly £73 lands in the bank account. The rest goes to income tax (£13), National Insurance (£7), student loan (£2), and pension (£5). Monthly take-home: approximately £2,299.
Want this built around your actual numbers?
Theo plugs into your bank (read-only, via TrueLayer) and turns this guide into a plan with your actual ISA allowance, pension, and income. Launching Summer 2026.
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