What Is PAYE?
PAYE - or 'pay as you earn' - refers to income tax which is deducted from your salary before you receive it. This is now the way most employees pay income tax, national insurance and other items such as student loans payments.
The money is sent to HMRC by your employer ‘at source’ – meaning directly from your pay before it reaches your account.
How is PAYE calculated?
PAYE is calculated based on how much you earn and whether you're eligible for the personal allowance.
The personal allowance is the amount you are able to earn tax-free each year. In 2023-24 it is £12,570 (it hasn't changed since 2021-22).
Above the personal allowance, you will be charged at either 20%, 40% or 45% depending on whether you are a basic rate, higher rate or additional rate tax payer. The rate you pay will be determined by your income.
PAYE is generally split into equal payments over the year. If it turns out that you have paid too much tax at the end of the year, you’ll receive a refund from HMRC. If you have paid too little tax, you will get a bill asking you to pay more.
The PAYE tax rates and thresholds for 2023-24 apply everywhere in the UK other than Scotland – these are illustrated below.
PAYE Tax Rates & Thresholds In England, Wales & NI
PAYE Tax Rates & Thresholds In Scotland
How Do Pensions Get Treated Under PAYE?
If You Only Receieve A State Pension (no longer working) - No PAYE Impact
The state pension is, like many state benefits, paid before tax (gross basis).
If you started getting your pension on or after 6 April 2016, don’t send a tax return. HMRC will write to tell you what you owe and how to pay.
If you started getting the pension prior to this date, an income tax self assessment retrun should be filed to calculate any tax due.
If You Receieve A State Pension & Private Pension (no longer working) - PAYE Impact
Your pension provider will take off any tax you owe before they pay you. They will also take off any tax you owe on your State Pension.
If you get payments from more than one provider (for example, from a workplace pension and a personal pension), HM Revenue and Customs (HMRC) will ask one of your providers to take the tax off your State Pension.
At the end of the tax year you’ll get a P60 from your pension provider(s) showing how much tax you have paid.
If You Receieve A State Pension & Continuing To Work As An Employee - PAYE Impact
Your employer will take any tax due off your earnings and your State Pension.
At the end of the tax year you’ll get a P60 from your pension provider(s) showing how much tax you have paid.
If You Receieve A State Pension & Continuing To Work As Self Employed - No PAYE Impact
If you are self-employed you must fill in a Self Assessment tax return at the end of the tax year. You must declare your overall income, including the State Pension and money from private pensions, for example your workplace pension.
What Documents Will I Be Issued With Under PAYE?
P60
At the end of each tax year (5 April), you will receive a statement, called a P60, from your employer or pension provider showing the gross total amount of money you have been paid, what tax has been deducted and how much net income you have received after this.
Where you have more than one employer, or more than one pension provider, each one should send you a separate P60 End of Year Certificate.
Check all P60s you receive to make sure you've paid the correct amount. If you think you might have paid too much tax, check HMRC’s income tax checker service and contact it to amend your record.
All employees should be issued with a P60 by the 31st May following the end of the tax year.
What Is A PAYE Tax Code?
Your tax code is used by your employer or pension provider to work out how much Income Tax to take from your pay or pension. HM Revenue and Customs (HMRC) will tell them which code to use.
A tax code is a mixture of letters and numbers - the numbers indicate how much the individual is allowed to earn tax free (their personal allowance) and the letters describe the situation of the individual (S would for example indicate that the tax payer is subject to the Scottish income tax rates whilst L would indicate that the tax payer is entitled to the standard personal allowance). More information on the different types of tax letters which you may see appearing against a tax code are provided on the HMRC website.
You can find your tax code on your payslip or tax code letter from HMRC.