What is PAYE and how does it work?

PAYE stands for Pay As You Earn. It is HMRC’s system for collecting income tax and National Insurance from employment: your employer takes the money from your pay before you receive it and sends it to HMRC. If you work for a school, trust, council or the NHS, your payroll team runs it for you.

What your employer does

Employers normally have to operate PAYE as part of their payroll. Payroll software works out how much tax and National Insurance to take, based on your pay and your tax code. HMRC says other deductions may be needed too, such as student loan repayments or pension contributions.

Payments covered include salary and wages, tips, bonuses and statutory sick or maternity pay. The employer reports each employee’s pay and deductions to HMRC on or before every payday. HMRC then shows the employer what it owes, and the employer pays it, usually every month. A small employer expecting to pay less than £1,500 a month can arrange quarterly payments.

Real-time reporting

Because the reports are sent each payday, HMRC’s records are updated through the year. This is how HMRC can change your tax code mid-year. When a new employee joins or their circumstances change, for example reaching State Pension age, the employer tells HMRC through the same regular reports.

How the tax code fits in

HMRC tells your employer which tax code to use. The code tells the payroll how much of your pay to treat as tax-free. For most people with one job it is 1257L, which reflects the £12,570 Personal Allowance. Each pay period, the software works out your taxable pay and applies the rates for your nation. See the 1257L guide and tax codes explained.

If you start a job without a P45 or other details, you may begin on an emergency code, which taxes each payday on its own until HMRC sends your proper code. See emergency tax codes.

An example month

Say your code is 1257L and your gross pay is £2,000 for the month. The monthly allowance is £1,048, so taxable pay is £952 and income tax at 20% is £190.40. National Insurance on the same pay is £76.16. Before pension and any student loan, that leaves £1,733.44. If you live in Scotland, the starter, basic and intermediate rates would apply to the same taxable pay in steps instead of one flat 20%. Wales uses the same rates as England for 2026/27.

Who is covered

An employer must register for PAYE when an employee is paid £96 or more a week, gets expenses and company benefits, is getting a pension, has had another job, or has received Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit. Pension payments also count, so pension providers deduct tax through PAYE in the same way.

PAYE does not cover everything. Income that is not run through payroll, such as rental profits or self-employed earnings, is reported separately through Self Assessment. Do employees need Self Assessment? explains when that applies.

What you get from it

Your payslip shows the tax, National Insurance and other deductions for each period. At the end of the year you get a P60, and a P45 when you leave. How to read your payslip and P45, P60 and P11D explain them.

PAYE is meant to get the tax roughly right in each pay period, but errors happen when HMRC has incomplete or wrong information. If the tax is wrong, GOV.UK says it is your responsibility to check, and the Check your Income Tax service shows your code, estimated income and the tax you can expect to pay for the year. After 5 April, HMRC can issue a P800 if it finds you paid too much or too little, which is covered in the P800 guide.

The rates PAYE applies are in how income tax works, and the take-home pay calculator estimates what is left after tax, National Insurance and pension.