What is PAYE?

PAYE stands for Pay As You Earn and it essentially means the money that gets deducted from your wages for tax. The PAYE systems takes your income tax and your national insurance contributions out of your wages. Your employer takes the tax before he pays you and sends the money to HMRC.

How does PAYE work?

PAYE is a banded tax system. If you have a tax code of xxxxL you will have a personal allowance of £xxxx0 a year on which you pay 0% tax. Then you pay set amounts depending on how much you earn see the table below for more detail. Or click this link

Personal Allowance £0 - £11,001 - 0% TAX

Basic Rate £11,001 - £43,000 - 20% TAX

Higher Rate £43,001 - £150,000 - 40% TAX

Additional Rate +£150,001 - 45% TAX

What other options are there?

Most people pay their tax through PAYE but if your tax affairs are more complex (if you’re self employed or have a high income) you can do a self assessment tax return every year. To find out more click the link for the GOV.UK website.

Where can I find my tax code?

Your PAYE tax code will be shown in a number of places:

On your payslip
On a notice of coding from your tax office
On your occupational pension statement

What are the letters in the tax codes?

L
L – If you were born after 05-04-1938 and you’re eligible for the basic personal allowance. You’ll also get this code if you are being taxed on the emergency code.
T
T – when HMRC needs to review some items with the employee
K
K – HMRC uses this code if your total tax allowances are less than the total that should be deducted. If your income is from pensions, benefits, interest or social security payments you can be given a K code.
BR
BR – You get the BR tax code if you haven’t got any allowances and your tax will be deducted at the basic rate. This code can be given if you have more than 1 job or more than one pension or when you start your first job and your employer is waiting for your tax code.
NT
NT – This applies if you don’t have to pay tax.
DO
DO – This is used if your job and or pension is taxed at 40% (normally if you have more than one job or pension)
OT
OT – This means you have no allowances after other adjustments have been made. Your tax will be paid at the basic rate or the higher rate – this depends on your income.
S
S – For any employee who’s main home is in Scotland
W1 or M1 (Week 1 or Month1)
W1 or M1 – These are emergency tax codes and tax will be calculated on the current pay period not on the whole year.

Useful Introductory Video To PAYE

Courtesy of Bright Star Accounting

PAYE History

PAYE was first developed by Sir Paul Chambers & Sir Cornelius Gregg in 1944. Due to the second world war the British government needed to collect more tax from more people in order to help rebuild the nation. This caused a number of difficulties at the time as many people had never come into contact with the tax system.

What If I Have Overpaid?

Sometimes people over pay their income tax because their situations change within the tax year or faults within the tax system. If you think you have paid too much or too little (better pay it now than wait for HMRC to chase you). HMRC will send you a P800 tax calculation form. This will show you how much tax is owed for the previous year. If you have overpaid they will refund you usually by sending a cheque in the post.

Click Here To Visit the HMRC PAYE Advice Service For Employers