What is PAYE Tax in the UK? - All You Need to Know!

Table of Contents

Last Updated on: 2nd October 2025, 12:32 pm

Have you ever looked at your payslip and wondered why part of your income disappears before it even reaches your bank account? That’s because of the PAYE system, Pay As You Earn.

It’s the UK’s way of collecting Income Tax and National Insurance directly from your earnings. Instead of paying taxes once a year, these amounts are deducted each time you get paid.

Whether you’re starting your first job, changing employers or receiving a pension, understanding how PAYE works can help you avoid overpayments and keep track of what you truly earn.

This blog breaks down everything you need to know about the PAYE system, including how it’s calculated, what gets deducted, what your tax code means and what forms you’ll need. If you’re working in the UK, this guide will help you understand where your money goes and how to make sure it’s correct.

What Is PAYE Tax?

PAYE, or Pay As You Earn, is the UK’s official system for collecting Income Tax and National Insurance directly from employees’ wages or pensions.

It is managed by HM Revenue and Customs (HMRC) and ensures that taxes are paid regularly rather than in one large annual lump sum. This system spreads your tax payments evenly across the year.

Here’s what PAYE includes:

Automatic deductions from your salary or pension every time you’re paid.
Employer-managed process where they deduct tax and National Insurance and pay it directly to HMRC.
Use of tax codes issued by HMRC to estimate how much tax should be deducted based on your circumstances.

The PAYE system is used for:

Employees earning over a certain threshold
Pensioners receiving occupational pensions
Workers with company benefits or multiple jobs

It doesn’t apply to self-employed individuals, who instead report their income through Self Assessment. If you’re on PAYE, you may still need to complete a Self Assessment form if you have other income sources.

PAYE makes tax payment convenient, but it’s not always exact. Your deductions are estimates and may vary due to income changes or incorrect tax codes. Regularly checking your payslip helps ensure you’re paying the right amount. For most people, PAYE works accurately, but understanding it means you stay in control.

How Does the PAYE Tax System Work in the UK?

The PAYE system works by deducting tax and National Insurance directly from your pay before it reaches you. It’s your employer or pension provider’s responsibility to apply this system correctly using the tax code HMRC issues to you.

Here’s how it works step-by-step:

HMRC assigns you a tax code based on your income and personal situation.
Your employer uses this tax code to determine how much tax and National Insurance to deduct from your salary.
Deductions are made automatically each time you are paid, whether monthly, weekly or otherwise.
Your employer sends the collected tax to HMRC on your behalf.

For pensioners, the process is the same. Pension providers deduct tax before paying out pensions. If you receive both pension and income from employment, both can be taxed under PAYE, and you may have different tax codes applied to each.

Each payslip will show these deductions clearly, helping you track how much tax you’re paying. Understanding this helps prevent surprises like overpayments or underpayments.

Remember, PAYE is designed to spread tax evenly and avoid large tax bills, but checking accuracy is still your responsibility.

What Is Deducted Through PAYE?

PAYE doesn’t just take care of your Income Tax. It also includes other essential deductions. Your employer ensures all necessary amounts are deducted from your gross pay before you receive your net pay.

Here’s what’s typically included:

Income Tax: Based on your earnings above the Personal Allowance threshold, which is currently £12,570 per year.
National Insurance Contributions (NICs): These are deducted if you earn above a certain threshold and are used to fund state benefits and the NHS.
Student Loan Repayments: If applicable, a portion of your income may be deducted toward your student loan.
Workplace Pension Contributions: If you’re enrolled in a pension scheme, your contribution is taken through PAYE.
Other Court or Council Deductions: Orders like Attachment of Earnings can also be deducted this way.

Every payslip you receive should show each of these items individually. If you notice unfamiliar deductions, ask your employer or HR department.

PAYE is an efficient system, but mistakes can happen, especially with tax codes. Staying informed ensures you’re only paying what you owe.

How Is PAYE Tax Calculated?

Your PAYE tax is calculated based on your income, tax code, and any applicable deductions or allowances. This ensures you only pay tax on income that exceeds your Personal Allowance.

To understand your tax, first consider:

Tax Code: This tells your employer how much of your income is tax-free.
Personal Allowance: For 2025/26, this is £12,570.
Tax Bands: After your allowance, you pay 20% basic rate, 40% higher rate or 45% additional rate based on your total income.

Let’s take an example to show how PAYE tax is calculated:

Monthly Salary	Tax Code	Tax-Free Amount	Taxable Income	Tax Rate	Tax Deducted
£2,500	1257L	£1,048	£1,452	20%	£290.40

In this example, £1,048 of the monthly pay is tax-free, and the remaining £1,452 is taxed at 20%. Therefore, the monthly Income Tax is £290.40.

Employers also deduct National Insurance:

You pay 12% on earnings between £1,048 and £4,189 per month
2% on anything above that

If your income changes each month due to bonuses or overtime, the PAYE system adjusts based on cumulative calculations using your tax code. This ensures you don’t overpay early in the year.

However, the system is not always perfect. If your tax code is incorrect or if you change jobs, you might pay too much or too little.

Always review your payslips and year-end documents like your P60 to make sure everything adds up correctly.

What Is a Tax Code and Why Does It Matter?

Your tax code determines how much of your income is tax-free and how much is taxable. Issued by HMRC, it’s based on your personal allowance and any adjustments for benefits or unpaid tax.

Here’s what you need to know:

Common Tax Code Example: 1257L, which means you get £12,570 tax-free annually.
Letters in Tax Codes: These represent different scenarios. For example, ‘L’ is for standard allowance, ‘K’ means you owe HMRC, and ‘BR’ indicates no allowance is applied.
Emergency Tax Codes: If HMRC hasn’t received your full employment history, they may assign an emergency code. This can result in overpaid tax, which is refunded once corrected.

Your tax code may change if:

You start a new job
You receive a company benefit
You earn income from other sources

Your employer uses your tax code to calculate how much tax to deduct from each pay. If it’s incorrect, you may pay too much or too little tax.

It’s your responsibility to check your tax code regularly, which appears on your payslip. You can also log in to your personal tax account on GOV.UK to review your current code. Understanding your tax code is essential for ensuring the correct tax is being taken from your income.

What PAYE Forms Should You Know About?

To manage your tax correctly under the PAYE system, there are several important forms and documents you should be aware of. These forms are issued by your employer or HMRC and provide vital information about your earnings, deductions, and tax status throughout the year.

Here are the key forms you’ll come across:

Payslip: Issued every time you’re paid, this shows your gross pay, tax deductions, National Insurance, and your tax code. It’s your first point of reference to check if everything looks right.
P45: Provided when you leave a job. It summarises your total pay and tax from that employment. You should give this to your next employer to avoid incorrect tax codes.
P60: Sent by your employer at the end of the tax year (5 April), this shows your total pay and tax for the year. It’s crucial for tax credits, mortgage applications, or claiming overpaid tax.
P800: Issued by HMRC if they believe you’ve overpaid or underpaid tax. It includes a breakdown and guidance on how to claim a refund or pay outstanding tax.

Each form serves a unique purpose and contributes to keeping your tax affairs accurate. Keeping track of them helps you understand how much you’ve earned and paid. Always store these forms safely, especially your P60 and P45, as they’re often needed for official purposes.

What Happens If You Overpay or Underpay PAYE Tax?

PAYE is designed to estimate your tax accurately throughout the year, but it isn’t always exact. Overpayments and underpayments can occur for various reasons, such as incorrect tax codes, job changes, or multiple sources of income. Thankfully, HMRC has systems in place to address this.

If you’ve overpaid:

HMRC will typically send you a P800 calculation explaining the overpayment.
You can claim a refund online or receive a cheque in the post.
If the refund isn’t claimed, it may be applied automatically to your tax code in the next year.

If you’ve underpaid:

HMRC may also notify you via a P800, stating how much you owe.
The shortfall is often collected by adjusting your tax code the following year, which means slightly higher deductions.
In cases of HMRC errors, you can request a write-off if they were at fault and you acted in good faith.

Keeping an eye on your tax code and payslips is the best way to avoid these issues. If you spot something unusual, contact HMRC early.

It’s much easier to resolve problems quickly than let them build over time. Tax accuracy helps avoid unexpected bills and keeps your finances on track.

What If You Have More Than One Job or Income Source?

Having more than one job or earning from multiple sources affects how PAYE tax is applied. Each income stream might be assigned a separate tax code, and it’s essential that these codes are used correctly to avoid paying too much or too little tax.

Key points to consider:

Only one job gets your Personal Allowance. HMRC usually assigns this to your main job or the one with the highest income.
Second jobs are taxed from the first pound unless your allowance is split between jobs.
Different tax codes might apply to each job to ensure correct deductions.

If you have income from self-employment, property, or investments, these are not handled through PAYE. Instead, you’ll need to complete a Self Assessment tax return to calculate and pay tax on these earnings.

For pensioners with more than one pension provider, typically only one uses the tax-free allowance. The rest are taxed in full unless otherwise arranged with HMRC.

To avoid mistakes, always inform HMRC when you take on a new role or receive a new income source. This helps ensure your tax codes are correct and your contributions are fair across all jobs or pensions.

What Are Your Responsibilities as an Employee?

While PAYE is largely managed by your employer and HMRC, you still have several responsibilities as an employee to ensure your taxes are accurate. Being proactive can help you avoid costly mistakes or unexpected tax bills.

Here’s what you should do:

Check your payslip regularly. Make sure your tax code is correct and deductions align with your income.
Review your P60 annually. This helps confirm that your total yearly income and tax match your expectations.
Inform HMRC of changes. If you start or leave a job, begin receiving benefits, or have a change in income, update HMRC as soon as possible.
Understand your tax code. Know what it means and how it impacts your take-home pay.
Store your documents. Keep copies of payslips, P45s, and P60s for at least three years in case HMRC requests them.

Even if your employer handles most of the tax process, you are ultimately responsible for making sure the information used is correct.

Tools on the HMRC website allow you to view your tax record, check tax codes, and track any underpaid or overpaid tax. Taking these steps puts you in control of your finances and ensures that you meet your tax obligations without surprises.

Conclusion

Understanding the PAYE system empowers you to manage your income effectively and avoid common tax pitfalls.

Whether you’re an employee, pensioner, or someone with multiple jobs, knowing how your tax is calculated, what your forms mean, and why your tax code matters can help you stay informed and proactive.

While employers and pension providers handle the actual deductions, it’s your responsibility to make sure everything is accurate.

Regularly reviewing your payslips, understanding your documents like the P45 and P60, and keeping your information up to date with HMRC will ensure that you’re paying the right amount of tax.

PAYE is a convenient system, but only when it’s applied correctly. With this knowledge, you can take control of your financial situation, avoid overpayments or underpayments, and confidently navigate your way through the UK tax system.

FAQs

How do I check if my tax code is correct?

You can find your tax code on your payslip and check its meaning using HMRC’s online tax code checker. It ensures you’re receiving the right tax-free allowance.

What should I do if I paid too much PAYE tax?

If you’ve overpaid PAYE tax, HMRC will usually notify you and offer a refund. You can also claim it through your Personal Tax Account.

Can I split my Personal Allowance between jobs?

Yes, you can ask HMRC to divide your Personal Allowance if neither job pays more than £12,570 per year. This helps avoid unnecessary taxation.

Why did I get a P800 form from HMRC?

A P800 is issued if HMRC finds you’ve paid too much or too little tax. It provides a breakdown and tells you how to claim a refund or pay the difference.