What is PAYE?

What is PAYE?

PAYE - or 'pay as you earn' - refers to income tax which is deducted from your salary before you receive it.

Introduced in 1944, this is now the way most employees pay income tax.

The money is sent to HMRC by your employer 'at source' - meaning directly from your pay before it reaches your account. National Insurance and student loan repayments may also be deducted in this way.

The alternative way to pay income tax is self-assessment, whereby individuals complete a self-assessment tax return and normally pay tax once or twice a year.

• Complete your 2023-24 tax return with the Which? tax calculator. Tot up your tax bill, get tips on where to save and submit your return direct to HMRC with Which?.

How is PAYE calculated?

PAYE is calculated based on how much you earn and whether you're eligible for the personal allowance.

The personal allowance is the amount you're able to earn tax-free each year. In 2024-25 it is £12,570 (it was the same in 2023-24).

Above the personal allowance, you'll be charged at either 20%, 40% or 45% depending on whether you're a basic rate, higher rate or additional rate tax payer. The rate you pay will be determined by your income.

The PAYE tax rates and thresholds for 2024-25 apply everywhere in the UK other than Scotland - these are illustrated below. If you live in Scotland, read our guide on Scottish income tax for more information.

Note that your personal allowance reduces by £1 for every £2 you earn over £100,000.

PAYE is generally split into equal payments over the year. If it turns out that you've paid too much tax at the end of the year, you'll receive a refund from HMRC. If you've paid too little tax, you'll get a bill asking you to pay more.

To work out how much tax you'll pay in 2024-25, use our UK income tax rates 2023-24 and 2024-25 guide and income tax calculator.

PAYE on your pension

PAYE is also used to collect tax from those who receive pension income. The money you receive is paid net, meaning after tax has been deducted.

Tax you owe will be collected by your pension provider (normally a pension scheme or annuity firm) and forwarded to HMRC. Your pension provider will also deduct any tax you owe on your state pension.

If you get payments from more than one provider - for example, a workplace pension and a private pension - HMRC will ask just one to take out the tax for your state pension payments.

How often tax is deducted depends on how often you're paid.

Some points to remember:

• If your only income is from the state pension: you must send in a self-assessment tax return to HMRC.
• If you continue to work while you are receiving your state pension: your employer will deduct PAYE you need to pay from your earnings, and PAYE you earn from receiving the state pension.
• If you have other income, it is is your responsibility to declare it and you may need to file a self-assessment tax return. Read our guide on how to fill in a self-assessment tax return for more information.

Find out more: state pension explained - find out how the State Pension works and how much you might receive

PAYE when you're self-employed

People who are self-employed commonly fill out self-assessment tax return forms once a year, and make two 'payment on account' deposits to HMRC in January and July.

In some circumstances, however, you can pay tax through PAYE instead - which means your tax is paid automatically and there's no danger of missing a deadline.

You can pay your self-assessment bill through PAYE if:

• You owe less than £3,000 on your tax bill.
• You already pay tax through PAYE - for example, if you're an employee or you get a company pension as well as earning income from self-employment.
• You submitted your paper tax return by 31 October or your online tax return online by 30 December.

If you meet these conditions, HMRC will automatically collect what you owe through PAYE unless you ask them not to on your tax return. If you're not eligible on all three points, you will have to pay by instalments instead.

We explain everything you need to know in our guide on how to file a self-employed tax return.

• Get a head start on your 2023-24 tax return with the Which? tax calculator and submit direct to HMRC.

PAYE and your P60

At the end of each tax year (5 April), you will receive a statement, called a P60, from your employer or pension provider showing the gross total amount of money you've been paid, what tax has been deducted and how much net income you have received after this.

Where you have more than one employer, or more than one pension provider, each one should send you a separate P60 End of Year Certificate.

Check all P60s you receive to make sure you've paid the correct amount. If you think you might have paid too much tax, check HMRC's income tax checker service and contact it to amend your record.

PAYE and your payslip

You can see how much PAYE tax you've paid, along with your PAYE tax code, on your payslip - it will be listed along with your National Insurance contributions and student loan repayments.

The example of a payslip below includes the most common deductions from your salary.

Here, we also explain the most common deductions you're likely to see on your payslip:

PAYE

In the example above, PAYE income tax is charged at 20%, less a personal allowance of £12,570 (for the 2024-25 tax year). This is signified by tax code 1257L.

The payment also includes a company pension contribution of £100.

National Insurance

National Insurance is deducted each pay period if your earnings are over a certain amount. In 2024-25, the threshold is £12,570.

Although some payments, such as pension contributions, qualify for income tax relief, you will still need to make National Insurance payments. Reimbursed expenses that are free of income tax are not automatically free of National Insurance.

The general rule is that if the reimbursement is a distinct payment specifically aimed at reimbursing, or making a contribution towards, expenses that you have actually incurred, then the payment should be free of National Insurance.

However, some expenses are always National-Insurance-free. This includes mileage allowance up to HMRC-approved rates if you use your own car for work, and operational and mess allowances and council tax relief payments for members of the Armed Forces.

Find out more: National Insurance explained - more on how this tax works.

Pension contributions

This may include contributions to your employer's pension scheme (including any voluntary contributions) or contributions that will be passed to a personal pension provider.

These contributions are usually taken out of your pay 'at source', and therefore you do not pay tax on them.

Student loan repayment

If you took out a student loan you'll be on one of four repayment plans, depending on where you're from and when you studied.

Plan 1

Under Plan 1, you'll start making student loan repayments once you're earning £22,015 a year.

Plan 2

Under Plan 2, you'll start making student loan repayments once your income is over £27,295 a year.

Plan 4

Under Plan 4 you'll begin repaying when your income is over £27,660 a year.

Postgraduate Loan

If you're on a Postgraduate Loan repayment plan, you'll begin repaying once your income is over £21,000 a year.

If you're on plans 1,2 or 4, you'll pay 9% of the amount you earn over the threshold. If you're on a Postgraduate Loan repayment plan, you'll pay 6% of your earnings above the threshold.

Find out more: repaying your student loan

Other deductions

Other deductions could include subscriptions to a trade union, or deductions under a court order to repay debts or pay child maintenance.

Tax-free pay

Though you pay income tax on most of your earnings (including overtime, bonuses, commission, tips and holiday pay), some payments from your employer are tax-free.

These do not count towards your taxable income, and do not have to be declared if you are sent a tax return.

They include:

• reimbursed expenses for which your employer has a formal agreement (a 'dispensation') with HMRC
• reimbursed expenses where your employer makes a voluntary agreement with HMRC to pay tax on your behalf
• mileage allowance up to HMRC-approved rates (45p per mile for the first 10,000 business miles and 25p per mile thereafter) if you use your own car for work
• payments of up to £6 for extra household costs if you regularly work at home by arrangement with your employer (your employer may pay more if you can supply evidence that it is justified)
• various allowances paid to members of HM forces, for example: operational allowance for members serving in combat zones, such as Afghanistan; mess allowance and travel to and from leave expenses; and council tax relief payments.

Find out more: Tax-free income and allowances

Tax-free lump sums

Extra payments, such as bonuses, from your employer are normally treated as salary and taxed in the normal way. However, some lump-sum payments are tax-free. These include:

• money your employer pays into a registered pension scheme or uses to buy an annuity for you
• most lump sums from a registered employer's pension scheme, including death benefits paid to your dependents
• pension gratuities you receive on leaving the armed forces
• the first £30,000 of most redundancy payments
• compensation paid by your employer if they break your contract, but not pay in lieu of notice if it is part of your contract or customary
• compensation for an injury or disability that means that you are unable to continue with your job
• awards made to employees for good suggestions to their businesses. These include tax exemption of up to £25 where paid to encourage or reward employees for special effort, and up to £5,000 for rewarding suggestions that will save or make the business money.

A genuine personal gift from your employer - for example, when you get married - is also tax-free, but the onus will be on you to show that it really was personal and not as a result of your being an employee.

If there is no income tax on a lump sum you receive, there will usually be no National Insurance contributions either.

Solving your PAYE problems

We give answers to some of the most common issues encountered with PAYE.