PAYE (Pay As You Earn) is the system HMRC uses to collect income tax and National Insurance contributions (NICs) from employees in real time — before your wages reach your bank account. Around 34 million UK employees are paid through PAYE. If you work for an employer, you almost certainly pay tax this way without having to file a tax return. Understanding PAYE helps you spot errors on your payslip, fix the wrong tax code, and ensure you are not overpaying or underpaying.
How PAYE Works Step by Step
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HMRC assigns you a tax code. The standard code for 2026/27 is 1257L, meaning you can earn £12,570 before any income tax is due. See our full UK tax code guide for every letter and number explained.
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Your employer receives your tax code from HMRC. Payroll software uses the code to calculate how much of your allowance has been used so far that year (cumulative basis).
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Employer deducts tax and NICs each pay period. Before paying your wages, your employer calculates and deducts both income tax and employee National Insurance, then pays the combined amount to HMRC by the 19th of the following month (22nd for electronic payments).
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You receive net pay. Your payslip shows gross pay, deductions itemised, and net (take-home) pay.
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HMRC reconciles at year end. After 5 April, HMRC checks whether the right amount of tax was collected across the year. If too much was taken, they issue a P800 refund. If too little, they may ask for a payment or adjust your code the following year.
What PAYE Deducts From Your Pay
Your payslip will show several deductions under PAYE:
| Deduction | What it is | 2026/27 rate |
|---|---|---|
| Income tax | Tax on earnings above your personal allowance | 20% / 40% / 45% |
| Employee NIC | National Insurance contributions | 8% (£12,570–£50,270), 2% above |
| Student loan | Automatic repayment if applicable | 9% above threshold (Plan 2: £27,295) |
| Pension (auto-enrolment) | Workplace pension contribution | Minimum 5% employee (if enrolled) |
PAYE does not automatically collect tax on:
- Rental income
- Self-employment income
- Savings interest above the Personal Savings Allowance
- Dividends above the Dividend Allowance
- Capital gains
Those are collected through Self Assessment.
How Your Tax Is Calculated Each Pay Period
PAYE uses a cumulative basis by default. This means your employer tracks how much allowance and taxable income you have used from the start of the tax year (6 April), not just in the current month.
Worked Example: Monthly Salary of £3,500 (£42,000/year)
| Item | Monthly | Annual |
|---|---|---|
| Gross salary | £3,500 | £42,000 |
| Personal allowance (1/12 per month) | £1,047.50 | £12,570 |
| Monthly taxable income | £2,452.50 | £29,430 |
| Income tax at 20% | £490.50 | £5,886 |
| Employee NIC at 8% | £194.60 | £2,335 |
| Estimated take-home | ~£2,815 | ~£33,780 |
Assumes no pension contribution, student loan, or other deductions.
For an accurate breakdown at your salary, see our UK income tax calculator.
How to Read Your Payslip
Your payslip must by law include:
- Gross pay — total earnings before deductions
- Income tax deducted — usually listed as “PAYE tax”
- National Insurance deducted — “Employee NIC” or “NI”
- Net pay — what is paid into your bank account
- Pay period — the dates covered
- Payroll number and NI number — your identifiers
Optional items that may appear:
- Student loan deduction
- Pension contribution (employee and sometimes employer share)
- Tax code in use
Check your tax code on every payslip. If it shows BR, 0T, or any code with W1/M1, you may be on an emergency code and could be overpaying tax.
PAYE Forms You Need to Know
| Form | What it is | When you get it |
|---|---|---|
| P60 | Year-end summary: total earnings and tax deducted | Each April from your employer |
| P45 | Leaving certificate: earnings and tax to date | When you leave a job |
| P11D | Taxable benefits report: company car, private medical etc. | By 6 July each year if you have benefits |
| P2 | Notice of Coding: your tax code and why | When HMRC changes your code |
| P800 | Tax calculation: refund or underpayment notice | After year end if amounts don’t balance |
What Can Go Wrong With PAYE
1. Wrong Tax Code
The most common PAYE error. If HMRC assigns the wrong code — for example BR (no personal allowance) instead of 1257L — you will overpay tax every month until it is corrected. Always check your payslip and compare it with our UK tax code guide.
2. Month 1 / Week 1 Emergency Basis
When you start a new job without providing a P45, your employer may use an emergency code on a non-cumulative (M1/W1) basis. Each month’s tax is calculated in isolation rather than accounting for your full-year allowance. You are likely to overpay, especially if you joined mid-year.
Fix: Provide your P45 to your new employer as soon as possible, or contact HMRC to update your record.
3. Starting Mid-Year
If you start work in October having been unemployed since April, you have six months of unused personal allowance. PAYE on a cumulative basis should account for this automatically once your employer receives your correct code from HMRC — but only if they have your P45 or HMRC has updated your record.
4. Multiple Jobs
If you have two jobs, your personal allowance (£12,570) can only be applied to one. Your second employer should use code BR (all income taxed at 20%) or the allowance can be split. If split incorrectly, you may underpay or overpay. Contact HMRC to assign your allowance appropriately across both jobs.
5. Underpaying Without Realising
If your income changes part-way through the year (e.g., a pay rise, bonus, or new benefit) and HMRC has not been notified, you may accumulate an underpayment. HMRC typically collects underpayments by adjusting your tax code the following year rather than issuing a direct bill.
PAYE vs Self Assessment: Who Needs Both?
Most employees only deal with PAYE. You need to file a Self Assessment return in addition to PAYE if:
- You earn over £100,000 (personal allowance begins to taper)
- You have income from self-employment, rental, or investments
- You claim the High Income Child Benefit Tax Charge (income over £60,000) — see our child benefit guide
- You are a company director
- You have foreign income
- HMRC specifically requests a return
How to Fix a PAYE Problem
| Problem | Solution |
|---|---|
| Wrong tax code | Contact HMRC via personal tax account or call 0300 200 3300 |
| Overpaid tax this year | Contact HMRC for an in-year repayment claim |
| Overpaid tax in a previous year | Claim via personal tax account (up to 4 years back) |
| Missing P45 from previous employer | Ask previous employer; register with HMRC if they cannot provide it |
| Employer not deducting student loan | Inform employer of your plan type; HMRC will issue a Start Notice (SL1) |
| Underpaid tax from prior year | HMRC will usually recover via adjusted tax code the following year |
National Insurance Under PAYE
Employee National Insurance is collected through PAYE alongside income tax but is calculated separately. For 2026/27:
- 8% on weekly earnings between £242 and £967 (equivalent to £12,570–£50,270/year)
- 2% on earnings above £967/week (above £50,270/year)
NICs credit you toward the State Pension. You need 35 qualifying years for the full New State Pension (£221.20/week in 2026/27). See our National Insurance guide for full rate tables by salary.
Related Articles
- UK Tax Codes Explained 2026/27 — What Is 1257L?
- UK National Insurance 2026/27 — Rates and Thresholds
- UK Income Tax Brackets 2026/27
- UK Income Tax Calculator
- UK Income Tax Guide 2026/27
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