PAYE stands for ‘pay as you earn’. It’s the system put in place to pay tax on your income before you receive it.

Employees and pensioners are given PAYE codes that determine the amount of tax taken from pensions or income earned. It’s advisable to check your code and query it with HMRC if you don’t understand it or think it may be wrong.

How Is PAYE Set Up?

PAYE involves three parties: HM Revenue and Customs (HMRC), your employer or pension provider, and you. They each play a key role in its operation. Tax due is deducted from your pay or pension under PAYE each time you are paid by your employer or pension scheme. How often tax gets taken depends on how often you are paid – usually weekly or monthly, but for some pensions it might be quarterly or annually.

How PAYE Is Calculated

The amount of tax taken by PAYE depends on how much you earn and whether you’re eligible for a personal allowance.

Personal allowance is the amount you’re allowed to earn tax-free each year. For the year 2018–2019, it’s set at £11,850. Once you go above the personal allowance, you’ll be charged 20%, 40% or 45% depending on the rate you’re on – something determined by your income.

These standard rates apply everywhere in the UK, apart from Scotland.

For those earning over £100,000, a reduction of £1 for every £2 earned over £100,000 is made from your personal allowance.

At the end of the year if it turns out you’ve paid too much tax, HMRC will offer you a refund. However, if you’ve paid too little, you may receive a bill requesting you to pay more.