PAYE explained

PAYE (Pay As You Earn) is the automated system HMRC uses to collect income tax and National Insurance from employees. Instead of you setting money aside and paying a bill at the end of the year, your employer deducts the right amount from every pay packet. This guide explains how it works and what to watch out for.

The cycle of pay

Each time you’re paid, your employer works out your tax using three pieces of information:

1. Your tax code, which tells them your tax-free allowance for the year
2. How much you’ve been paid so far this tax year (PAYE is cumulative)
3. The income tax bands and NI thresholds

Tax is calculated on the total for the year-to-date, so if your pay varies month to month, PAYE smooths it out automatically.

Who’s involved

• You — the employee, who supplies a tax code and starter information when you join
• Your employer — works out deductions, pays them to HMRC, and gives you a payslip showing what’s been taken
• HMRC — issues tax codes, collects the money, and reconciles everything at the end of the year

What gets deducted

PAYE collects both income tax and Class 1 National Insurance, and often handles student loan repayments too. Voluntary deductions like pension contributions can also run through payroll, reducing your taxable pay.

Paperwork you might see

• Payslip — shows gross pay, tax, NI, pension and other deductions, and your take-home pay
• P60 — the end-of-year summary of pay and deductions
• P45 — given when you leave a job, carrying your tax record forward
• P11D — details of expenses and benefits (e.g. company car) for higher earners or those with benefits

What can go wrong

PAYE is designed to be accurate, but errors happen: a wrong tax code, the allowance being split across multiple jobs, or untaxed income such as savings interest pushing you into a different band. If your circumstances change — a pay rise over £100,000, a second job, or receiving rental income — tell HMRC so your code stays correct. See our how tax codes work guide for how to spot problems.

The end of the year

After 5 April each year, HMRC checks your tax against your actual income. If you overpaid, you usually get it back automatically through your pay or bank. If you underpaid by a small amount, HMRC can collect it by adjusting next year’s tax code. For anything unusual, HMRC may write to you with a PAYE tax calculation — keep it safe as it’s the record of the year.

See it in numbers

The salary calculator recreates the PAYE calculation for any salary — try it to see your monthly tax, NI, pension and student loan deductions. The income tax calculator isolates the income tax part.