PAYE: How the Pay-As-You-Earn System Works

With the pay-as-you-earn (PAYE) system, your employer deducts income tax and national insurance from your salary.

Rebecca Goodman Published on 16 December 2020. Last updated on 20 January 2021.
PAYE: How the Pay-As-You-Earn System Works

The PAYE system is the most common way of paying income tax and national insurance in the UK. If you pay tax this way you won’t usually need to pay further tax to HM Revenue & Customs, as it has already been done for you by your employer. It’s also up to your employer to pay the tax to HMRC.

It is different for self-employed workers who have to file a tax return and then pay income tax and national insurance directly to HMRC themselves.

Here we look at everything you need to know about PAYE.

How does PAYE work?

The majority of workers in the UK pay tax with PAYE. The amount of tax you pay over a year is calculated on a monthly basis and this is deducted from your wages before it is paid into your bank account.

Your employer is in charge of taking the tax and calculating how much to deduct, and you will have a tax code which tells them how to do this.

At the end of the tax year, which runs from 6 April to the following 5 April, you will receive a P60 and this is a document which shows you how much tax you have paid for that year.

If you need to check your PAYE details at any point, you can ask your employer, check your payslip or previous P60, or even call HMRC.

What if I have other sources of income?

In some instances those with PAYE may still have to file a tax return, but this is usually only if they are earning money in another way, such as with a second job or through income from shares or a rental property.

Is PAYE just for my wages?

Tax can be taken from a variety of different places with the PAYE system, including if you pay tax on a private pension. If you owe tax to HMRC — for example, if you had previously underpaid some tax — this can also be collected through PAYE.

Do I need to set up my own PAYE payments?

Your employer is the one to set up PAYE and should organise this for you. Once it’s set up, your payments will automatically come out of your wages, and these will be shown in your payslips. Review your payslips to make sure the correct amount is being deducted.

How can I check I’m paying the correct tax rate?

Anyone paying tax through PAYE will have a tax code that looks like a series of numbers and letters. This tells an employer how much tax they should be paying, and the code can change if the worker’s circumstances change, such as if they start earning more money, change jobs, or take on more work.

If a tax code is incorrect, this could mean the wrong rate of tax is being paid. Therefore it’s important to check your code whenever your circumstances change to make sure you’re not over- or underpaying tax.

How much tax should I be paying

The amount of tax you pay will depend on the kind of work you do, how much you earn and your income from other sources. Most people in the UK have a personal allowance that allows them to earn a certain level of money before they start paying tax. For the 2020/21 tax year this is £12,500.

Anything you earn between £12,501 and £50,000 will be charged at the basic rate of tax, which is 20%, and anything from £50,001 is charged at the higher rate of 40%. Income over £150,001 is taxed at 45%.

About the author:

Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more

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