The correct way to calculate PAYE tax on monthly or weekly salary

Our previous article about the correct way to calculate personal allowance explained that free pay is not just the yearly value divided by 12 or 52 when the employer pay schedule is monthly or weekly. The formula is an algorithm replicating the paper-based conversion tables.

Calculating PAYE tax on monthly or weekly salaries is not as complicated as getting the allowance amount. Still, there are also some hidden rules that you must know to understand the PAYE tax your payroll software will calculate.

In this article, we assume you have already come up with the employee's personal allowance.

We recommend check your calculations using our take-home pay calculator at the bottom of this article.

Rounding rules

Before discussing detailed explanations, it's essential to clarify how HMRC handles decimals. Not applying them can lead to 0.01 or 0.02 discrepancies in results.

Results from intermediate steps for calculating PAYE tax shouldn't be rounded. Instead, take the calculations for all tax formulae to 4 decimal places of a pound without correcting the final place.

When adding up all the tax bands, the final calculation step requires rounding the result to the nearest 1p below.

Converting annual thresholds into monthly or weekly ones

If you go to the HMRC website to find the PAYE thresholds and rates, you'll find tables with values for annual, monthly and weekly schedules. Weirdly, you should be careful with these values as they are incorrect if you use them to compute your employee PAYE tax based on a monthly or weekly salary. HMRC simplified these values to make them more practical.

In fact, you should always divide the annual value by the period number to find the threshold values, which should be truncated to the fourth decimal place.

One nuance on wording: when HMRC asks for tax to be rounded 'to the nearest pound below' or 'nearest penny below', it always means rounding DOWN, in the taxpayer's favour. Where HMRC asks for a genuine 'nearest penny' (as in National Insurance calculations), standard rounding applies with one twist: an exact half penny rounds down. So £67.5560 becomes £67.56, £67.5549 becomes £67.55, and an exact £67.5550 also becomes £67.55.

Here are the actual thresholds and rates (2026-27):

Step 1 - Comparing the taxable salary with the earning thresholds

The first step in applying the correct tax rate to taxable pay is to check which threshold the taxable income falls under. This is a straightforward comparison between the pay amount and the bands. If you are unsure how to get the correct taxable pay, check our previous handout about the proper way to calculate personal allowance.

Example for month #1

For instance, let's check which band a given monthly taxable pay of £2,000.10 for someone working in Scotland would fall in for the first month of the 2026-27 tax year.

As per the table above, the first three monthly thresholds for month 1 are 330.5833 (starter threshold), 1,413.0000 (basic threshold) and 2,591.0000 (intermediate threshold). So our taxable pay falls between the basic and intermediate thresholds.

Example for month #2

The above example is very straightforward. However, you can't assume it's right for subsequent months or weeks (or fortnights, four weeks, and so on) as you have to account for period numbers. Let's make it concrete. Suppose you want to know what rate to apply for the employee from our first example.

For month 2, every threshold is multiplied by the period number: the first three become 661.1666, 2,826.0000 and 5,182.0000, and the taxable pay to date is £4,000.20.

It doesn't seem to be a big difference. But the problem is that you can carry tiny decimal errors throughout the tax year if you don't work that way.

Step 2 - Calculate the amount of tax per threshold

To understand the concept of cumulative bands better, imagine a measuring jug with lines corresponding to the thresholds. In this analogy, the water you pour into the glasses is the taxable pay.

When the water goes above a measure, you have used the entire threshold. When no water is left, you must measure the difference between the water level and the first line underneath.

Example for month #1

Let's use the example from Step 1 to make this clearer.

Our Scottish employee's taxable pay is £2,000.10 for the first month of the 2026-27 tax year, meaning the gross salary minus their monthly free pay.

PAYE tax on the first band = 330.5833 * 19%
PAYE tax on the first band = 62.8108

PAYE tax on the second band = (1,413.0000 - 330.5833) * 20%
PAYE tax on the second band = 216.4833
Note that you tax the WIDTH of the band, the amount between the two thresholds, not the whole cumulative threshold. Multiplying 1,413.0000 by 20% would tax the first 330.58 of income twice, once at 19% and once at 20%.

PAYE tax on the third band = (2,000.10 - 1,413.0000) * 21%
PAYE tax on the third band = 123.2910

Notice that because the taxable pay sits below the third threshold of 2,591.0000, the top slice is the taxable pay minus the second threshold, not a full band width.

Example for month #2

In month #2, our Scottish employee's taxable pay is 4000.

PAYE tax on the first band = 661.1666 * 19%
PAYE tax on the first band = 125.6216

PAYE tax on the second band = (2,826.0000 - 661.1666) * 20%
PAYE tax on the second band = 432.9666

PAYE tax on the third band = (4,000.20 - 2,826.0000) * 21%
PAYE tax on the third band = 246.5820

Step 3 - Calculate the tax for the current period

This is the most intuitive step of all. To get the PAYE tax of any given salary, you must add it all up.

PAYE tax = PAYE tax threshold 1 + PAYE tax threshold 2 + PAYE tax threshold 3 + PAYE tax threshold n

Example for month #1

From the example from step 2, it would work like this:

PAYE tax = 62.8108 + 216.4833 + 123.2910
PAYE tax (before rounding) = 402.5851
PAYE tax (after rounding to the nearest 1p below) = 402.58

Example for month #2

PAYE tax = 125.6216 + 432.9666 + 246.5820
PAYE tax due to date (before rounding) = 805.1702
PAYE tax due to date (after rounding to the nearest 1p below) = 805.17

Notice that the tax due to date at month 2 (805.17) is not exactly twice the month 1 figure (2 x 402.58 = 805.16). That single penny is the whole point of the cumulative method: the unrounded fractions carry forward inside the calculation instead of being lost each period. This is the usual misconception about PAYE: it's frequently assumed, including by some reputable accountants, that taxing each month independently with the simplified thresholds listed on HMRC's website is sufficient. Over a full year, those dropped fractions and threshold simplifications drift the result.

Step 4 - Calculate tax deduction or refund

The calculation done in step 3 is insufficient to precisely know how much PAYE tax the employee will pay for a given period. Indeed, an additional step is required to ensure the result will be correct even if the employee's tax code or salary has changed, as well as the legislation.

In this final step, you subtract the tax already deducted in previous periods from the tax due to date from step 3. For the first pay period of the tax year it's simple: nothing has been deducted yet, so the deduction is 402.58 - 0 = 402.58. For month 2, the deduction is 805.17 - 402.58 = 402.59, one penny more than month 1 because of the carried fractions.

Now suppose that in month 2 the employee's tax code changes to NT. Not only is the tax for the period zero, but the tax already paid must be refunded through payroll. The calculation becomes 0 - 402.58 = -402.58: that amount is added to the employee's take-home pay, and the employer recovers it from HMRC through the next remittance.

Check your results

You can use our below calculator to check your results. However, beware that you can only do it on a non-cumulative basis. Only our comprehensive software can help you running multiple successive payroll to check the results for subsequent periods.