How PAYE Works in the UK
PAYE — Pay As You Earn — is the system HMRC uses to collect income tax and National Insurance from employees' wages before they receive their pay. Rather than paying a large tax bill once a year, PAYE spreads your tax liability across every pay period, making it manageable and largely invisible. If you're an employee in the UK, PAYE is the reason your payslip shows deductions and why your bank balance doesn't match your contract salary.
The History of PAYE
PAYE was introduced in 1944 during World War II to ensure a steady flow of tax revenue to fund the war effort. Before PAYE, employees paid tax in two lump sums per year, which caused hardship and unpredictable government revenue. The system has been updated many times since, but the core principle remains: your employer acts as an unpaid tax collector on HMRC's behalf.
How Your Employer Calculates PAYE
Every time your employer runs payroll, they follow these steps:
- Check your tax code. Your tax code tells your employer how much tax-free income (personal allowance) to apply. The standard code 1257L means £12,570 of tax-free income per year.
- Calculate cumulative earnings. PAYE works cumulatively — your employer tracks your total earnings and total tax paid from the start of the tax year (6 April).
- Calculate tax due to date. Based on your cumulative earnings and the tax bands, your employer calculates the total tax you should have paid by this point in the year.
- Subtract tax already paid. The tax already deducted in previous pay periods is subtracted. The difference is the tax for this period.
- Calculate National Insurance. NI is calculated per pay period (not cumulatively). If your monthly earnings exceed £1,048 (£12,570 ÷ 12), you pay 8% up to £4,189/month and 2% above that.
- Apply other deductions. Student loan repayments, pension contributions, and any other payroll deductions are calculated.
- Report to HMRC via RTI. Your employer submits a Real Time Information (RTI) report to HMRC every time they pay you, detailing your earnings and deductions.
Why PAYE Is Cumulative
The cumulative nature of PAYE is important because it ensures you pay the right amount of tax over the full year, even if your pay varies month to month. If you receive a large bonus in one month, you'll pay more tax that month. But if the following months return to normal, PAYE will automatically adjust so your total tax for the year is correct.
This also means that if you start a new job partway through the year, your first payslip may be unusually high or low. Your new employer uses a cumulative calculation, so if you've already used some of your personal allowance at your previous job (shown on your P45), the remaining allowance is spread across the remaining months.
Week 1 / Month 1 Basis
Sometimes HMRC instructs your employer to apply a "non-cumulative" basis (also called Week 1 or Month 1). This means each pay period is treated independently — your employer doesn't consider what you earned earlier in the year. This is common when:
- You start a new job without a P45 from your previous employer.
- HMRC is investigating your tax code and applies a temporary emergency code.
- You have complex tax affairs that can't be handled cumulatively.
Week 1/Month 1 can result in over- or under-taxation. Once HMRC resolves the issue, they'll switch you back to cumulative basis and any over-deducted tax will be refunded through your payslip.
Your Tax Code Explained
Your tax code is the key instruction HMRC gives your employer. It determines how much tax-free income you get:
| Code | Meaning |
|---|---|
| 1257L | Standard personal allowance of £12,570 |
| S1257L | Scottish taxpayer with standard allowance |
| C1257L | Welsh taxpayer with standard allowance |
| BR | All income taxed at 20% (no allowance) — common for second jobs |
| D0 | All income taxed at 40% — used when combined income is in higher rate |
| 0T | No allowance — HMRC hasn't determined your code yet |
| K codes | You owe more tax than your allowance — extra tax deducted |
The number in your tax code multiplied by 10 (and add 9) gives your annual tax-free amount. So 1257L means £12,570 (1257 × 10 + 9 = £12,579, rounded to £12,570). If your code is 1100L, your allowance is £11,009 — typically reduced because of benefits in kind or previous underpayment.
What Appears on Your Payslip
A typical UK payslip includes:
- Gross pay: Your total earnings before deductions (basic salary plus any overtime, bonus, or commission).
- Tax (PAYE): Income tax deducted based on your tax code and cumulative earnings.
- NI: National Insurance contributions for that pay period.
- Pension: Your workplace pension contribution (employee portion).
- Student loan: Repayment deducted if you earn above your plan's threshold.
- Other deductions: Salary sacrifice, childcare vouchers, payroll giving, etc.
- Net pay: What actually hits your bank account.
- Year-to-date (YTD) figures: Cumulative totals for the tax year so far.
P45, P60, and P11D
| Document | When | Purpose |
|---|---|---|
| P45 | When you leave a job | Shows your pay and tax to date. Give parts 2 and 3 to your new employer so they apply the correct tax code. |
| P60 | After 5 April each year | Annual summary of your total pay and tax for the tax year. Keep this — you may need it for mortgage applications or self-assessment. |
| P11D | After 5 April (if applicable) | Reports benefits in kind (company car, medical insurance, etc.). These are taxed via your tax code the following year. |
When PAYE Goes Wrong
PAYE isn't perfect. Common issues include:
- Wrong tax code: If HMRC applies the wrong code, you'll over- or under-pay tax all year. Check your code on every payslip.
- Emergency tax: A new job without a P45 can result in emergency tax (0T or BR code), significantly over-deducting until HMRC resolves it.
- P800 tax reconciliation: After the tax year ends, HMRC checks whether you paid the right amount. If not, they send a P800 — either a refund or a bill. You have 60 days to query a P800 before HMRC collects any underpayment.
- Two jobs with incorrect codes: If you have two employments and the codes don't reflect your combined income, you'll underpay tax during the year.
PAYE and Self-Assessment
Most employees only need PAYE — they never file a tax return. However, you must register for Self Assessment if you:
- Earn over £150,000 per year.
- Have significant income from savings, investments, or property.
- Are self-employed alongside employment.
- Need to claim tax relief not handled through PAYE (e.g., higher rate pension relief via relief at source).
- Have foreign income.
- Have capital gains above the annual exempt amount.
How to Check Your PAYE Is Correct
- Log in to your Personal Tax Account on GOV.UK.
- Check your tax code for each employment.
- Verify your estimated income for the year matches reality.
- Check for any benefits in kind or underpayments being collected.
- Use our salary calculator to verify the figures match your payslip.