What is PAYE?

PAYE stands for Pay As You Earn, and it is a simple way for HMRC to collect your income tax in regular monthly installments rather than a lump sum once a year.

Under the PAYE system your employer deducts your tax and national insurance contributions from your wages before paying you, so you will see the deductions on your payslip each month.

Usually you won’t have to do anything about it yourself. However, it’s worth keeping an eye on how much tax you are paying as you could be on the wrong tax code or be owed a refund for work expenses.

Tax refunds

Tax returns

How PAYE works…

PAYE involves HMRC, your employer and you. HMRC will…

calculate your tax code
send you a PAYE coding notice (known as a P2 form) if required, which explains how they calculated your tax code. Even if HMRC are not required to provide a coding notice in your particular case, you can still request one if you want to see yours
inform your employer what your tax code is

When they have received your tax code your employer will then use it to calculate how much tax to deduct from your weekly or monthly pay. They will then pay the amount they deduct from all of their employees pay to HMRC on a regular basis – usually once a month.

In order to make sure you are not paying too much tax, you need to ensure your tax code is correct. Your employer will use your tax code to work out how much tax needs to be deducted as part of the PAYE process.

National insurance is also deducted from your wages each month, along with other payments like your Student Loan repayments.

What paperwork should you get under PAYE?

There are a few forms that come with PAYE that you should become familiar with, including:

P60: this form displays your total income and what tax you’ve paid in a given tax year
P45: you get this when you leave a PAYE job. Your P45 is important if you need to prove if you are owed a tax refund as you didn’t work for a full tax year, for instance
P11D: if you receive any extra benefits form your job such as a company car or health cover then these need to be reported to HMRC via a P11D form

For more details apply online or call 0333 240 6122

Do I need to pay PAYE tax if I’m self-employed?

No, PAYE is for workers who are employed. If you are classed as self-employed then your tax contributions will be calculated and paid via the Self-Assessment process.

PAYE and pensions

As well as collecting income tax contribtions, PAYE is also used to collect tax from people who receive pension income.

If you owe tax on any income you get when retired, then this will be taken by your pension provider (e.g. the annuity firm or pension scheme) and paid directly to HMRC – with you receiving the remainder net of any tax deducted.

This doesn’t apply to your state pension though, which is paid gross i.e. no tax is deducted from it. However, this does count against your tax-free personal allowance and will affect how much private pension income you can get before tax.

Can I still be due a tax refund if I’m on PAYE?

Yes, there are many reasons why a PAYE employee may be eligible to make a tax refund claim.

A lot of employees simply assume that their tax must be correct if it is going through the PAYE system, so they don’t take the time to check it. As a result there is a lot of workers out there missing out on money that is rightfully theirs.

For example, if you travel to any temporary workplaces as part of your job (e.g. different building sites) then you will probably be paying out for fuel or public transport, as well as food and maybe sometimes even accommodation costs – all of which can be included as part of a tax rebate claim…