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PAYE (Pay As You Earn): how does it work?

What is PAYE?

PAYE basically means paying income tax and national insurance (NI) through your wages.

Every time you’re paid, your employer takes your tax and NI from your wages and sends it to HMRC

Other things that you might be paying via PAYE are:

  • student loan repayments
  • and pension contributions.

What documents will I receive?

DocumentWhat it showsWhen you get it
PayslipIncome Tax
National Insurance
student loans
pension contributions
your tax code
monthly
P60the Income Tax that your employer paid last yearin April
(for the tax year that just ended)
P45samewhen you leave a job
Notice of codingyour new tax codeJanuary or February
(for the following year starting in April, and only if you’re claiming tax reliefs or paying other taxes through PAYE)

How is my PAYE income tax calculated?

Until you earn over £12,500, you don’t pay any income tax – this is called the Personal Allowance.

Whatever you earn over this amount will be taxed like this:

  • 20% on anything you earn between £12,500 and £50,000
  • 40% on anything you earn between £50,000 and £150,000
  • 45% on anything you earn over that.

Besides income tax, about 12% of your wages will go to National Insurance – use our net salary calculator to see how much you should have at the end of the month.

I think I’ve paid too much, can I claim tax back?

Yes.

HMRC uses a tax code to tell your employer how much tax to deduct from your wages.

A tax code is made of a number followed by a letter:

  • the number shows how much Personal Allowance you’re getting
  • the letter shows what kind of taxpayer you are.

Don’t worry about understanding all the letters (here is a longer guide on the tax code if you’re curious), just remember that in the 2019/20 tax year, the most common tax code is 1250L.

Basically, if your tax code is not 1250L, contact HMRC – you might be due a tax rebate.

I’m also self-employed, how do I pay tax?

If you’re have a side gig besides your full-time job, you need to pay tax on this income by filing a Self Assessment tax return.

If you earn less than £1,000 from self-employment, don’t worry – it’s tax-free and you don’t need to report it.

I’m a pensioner, how do I pay tax?

Your pension provider will pay tax in a way similar to PAYE – in most cases you don’t need to worry about doing a tax return.

This page from the UK Government shows it works and how much you can take out of your pensions pots tax-free.

Do I need to file a tax return?

Most people in full-time jobs who only have PAYE income never have to bother with tax returns.

The only times when you need to submit a Self Assessment tax return are:

If you’re not sure which one applies to you, read our guide to who needs to file a tax return here – it’s a long list.

If you do need to file a tax return, our certified accountants can do it for you 100% online and for a flat £119.

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