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Tax codes & PAYE

What is PAYE?

By Ian Robinson

Article 8 of 10

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What is PAYE?

PAYE (pay as you earn) is a way of collecting income tax so you pay it in regular monthly instalments, rather than a once a year. 

Introduced in 1944, PAYE is the main way of paying income tax and is used by around 20 million people a year. 

The alternative is self-assessment, whereby individuals complete a self-assessment tax return and normally pay tax once or twice a year. 

This guide explains how PAYE works and what you need to know about it.

  • Get a head start on your 2016-17 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

PAYE and employees

PAYE is the way that most employees pay income tax. Money is deducted 'at source' - meaning directly from your monthly pay - each month by your employer, as directed by your tax code, and forwarded to HM Revenue & Customs (HMRC).

Find out more: PAYE tax codes - find out what your tax code means 

National Insurance is also deducted at source each month, together with other payments, such as Student Loan repayments.

Your 'gross income' is what you are paid before any tax or National Insurance has been deducted. Net income is what you are paid after these deductions have been made. 

Those above state pension age (currently 65 for men and 63/64 for women, depending on when they were born) do not pay National Insurance on their earnings.

Find out more: National Insurance explained - find out how National Insurance works and how much you contribute       

PAYE and pensioners

PAYE is also used to collect tax from those who receive pension income. If you owe tax on your income in retirement, this is collected by your pension provider (normally a pension scheme or annuity firm) and forwarded to HMRC. 

The money you receive is paid net (after tax has been deducted). 

State pension, however, is paid gross, with no tax deducted. This counts against your tax-free personal allowance and reduces the amount of private pension income you can receive before tax is due. 

Find out more: State pension explained - find out how the State Pension works and how much you might receive

P60 End of Year Certificate

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've 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.

  • Last revised: April 2017
  • Reviewed by: Gareth Shaw

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