What is PAYE?
PAYE - or 'pay as you earn' - refers to income tax which is deducted from your salary before you receive it.
Introduced in 1944, this is now the way most employees pay income tax.
The money is sent to HMRC by your employer ‘at source’ – meaning directly from your pay before it reaches your account. National Insurance and student loan repayments may also be deducted in this way.
The alternative way to pay income tax is self-assessment, whereby individuals complete a self-assessment tax return and normally pay tax once or twice a year.
Complete your 2017-18 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?.
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're able to earn tax-free each year. In 2018-19, the personal allowance is £11,850.
Above the personal allowance, you’ll be charged at either 20%, 40% or 45% depending on whether you’re a basic rate, higher rate or additional rate tax payer. The rate you pay will be determined by your income.
The PAYE tax rates and thresholds for 2018-19 apply everywhere in the UK other than Scotland – these are illustrated below. If you live in Scotland, read our guide on Scottish income tax for more information.
|Income tax bands|
|Tax rate||2017/18|| |
|Personal allowance||£0 - £11,500||£0 - £11,850|
|Basic rate (20%)||£11,501 - £45,000||£11,851 - £46,350|
|Higher rate (40%)||£45,001 - £150,000||£46,351 - £150,000|
|Additional rate (45%)||£150,001+||£150,001+|
Note that your personal allowance will reduce by £1 for every £2 you earn over £100,000.
PAYE is generally split into equal payments over the year. If it turns out that you’ve paid too much tax at the end of the year, you’ll receive a refund from HMRC. If you’ve paid too little tax, you’ll get a bill asking you to pay more.
To work out how much tax you'll pay in 2018-2019, use our income tax calculator.
PAYE on your pension
PAYE is also used to collect tax from those who receive pension income. The money you receive is paid net, meaning after tax has been deducted.
Tax you owe will be collected by your pension provider (normally a pension scheme or annuity firm) and forwarded to HMRC. Your pension provider will also deduct any tax you owe on your state pension.
If you get payments from more than one provider - for example, a workplace pension and a private pension - HMRC will ask just one to take out the tax for your state pension payments.
How often tax is deducted depends on how often you’re paid.
Some points to remember:
- If your only income is from the state pension: you must send in a self-assessment tax return to HMRC.
- If you continue to work while you are receiving your state pension: your employer will deduct PAYE you need to pay from your earnings, and PAYE you earn from receiving the state pension.
- If you have other income, it is is your responsibility to declare it and you may need to file a self-assessment tax return. Read our guide on who should submit a tax return for more information.
Find out more: State pension explained - find out how the State Pension works and how much you might receive
PAYE when you're self-employed
People who are self-employed commonly fill out self-assessment income tax forms once a year, and make two ‘payment on account’ deposits to HMRC in January and July.
In some circumstances, however, you can pay tax through PAYE instead – which means your tax is paid automatically and there's no danger of missing a deadline.
You can pay your self-assessment bill through PAYE if:
- You owe less than £3,000 on your tax bill.
- You already pay tax through PAYE – for example, if you’re an employee or you get a company pension as well as earning income from self-employment.
- You submitted your paper tax return by 31 October or your online tax return online by 30 December.
If you meet these conditions, HMRC will automatically collect what you owe through PAYE unless you ask them not to on your tax return. If you’re not eligible on all three points, you will have to pay by instalments instead.
We explain everything you need to know in our guide to income tax for the self-employed.
Get a head start on your 2017-18 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 your 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'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.
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.
PAYE and your payslip
You can see how much PAYE tax you’ve paid, along with your PAYE tax code, on your payslip – it will be listed along with your National Insurance contributions and student loan repayments.
The example of a payslip below includes the most common deductions from your salary.
Here, we also explain the most common deductions you're likely to see on your payslip.
Solving your PAYE problems
We give answers to some of the most common issues encountered with PAYE.