PAYE (Pay As You Earn)

PAYE is the system HMRC uses to collect income tax and Class 1 National Insurance from employment income at the moment it is paid, rather than through a return after the year has ended. Your employer is the collector: it applies the tax code HMRC issues, works out the tax and National Insurance due on that payday, pays you the balance, and pays HMRC by the 22nd of the following tax month when paying electronically.

Income tax under PAYE is normally cumulative. At every payday the employer recalculates the tax due on your pay for the whole year to date, subtracts what has already been deducted, and takes the difference. That is why a month with no pay can produce a refund through payroll, and why a bonus month can look as though it has been taxed at an impossible rate before the following months settle it. National Insurance behaves differently: it is worked out on each pay period in isolation, which is why two people with identical annual pay can pay different amounts of NI if one of them received it unevenly.

PAYE also carries deductions that are not tax at all. Student and postgraduate loan repayments, attachment of earnings orders, workplace pension contributions and payrolled benefits are all applied in the same payroll run and appear on the same payslip, which is why a payslip is the only place most people can see all of them together.

PAYE is an estimate designed to be exactly right by 5 April, and for most people it is. Where it is not, the cause is almost always a wrong or non-cumulative tax code, a second job coded as though it were the first, or a benefit HMRC still assumes you receive. HMRC reconciles the year after the final payroll submission and issues a P800 or a simple assessment where its figures and the employer's do not agree.