Find out what pay-as-you-earn, or PAYE, is and how your income tax is computed, as well as what steps to take if you believe HMRC is charging you an incorrect amount.
What exactly is a PAYE?
The phrase “pay as you earn” (PAYE) refers to the process by which income tax is withheld from a person’s wage before that person actually receives that compensation.
The majority of employees currently pay their income tax in this manner, which was first implemented in 1944.
Your company will deduct the money “at source,” which means that it will come immediately out of your salary before it is deposited into your account and then send it on to HMRC. This method also allows for deductions to be made for things like national insurance and the repayment of student loans.
Self-assessment is an alternative method of paying income tax that requires individuals to fill out a self-assessment tax return and make tax payments on a regular basis, which are often once or twice per year.
Utilize the tax calculator provided by Which? to complete your tax return for the 2021-22 tax year. Calculate your expected tax liability, see where you may be able to cut costs, and send your return to HMRC
How is the PAYE rate determined?
The Personal Allowance and Your Earnings (PAYE) calculation depends on both the amount of money you make and whether or not you are qualified for the personal allowance.
The amount of money you can make without having to pay taxes on it each year is referred to as your “personal allowance.” It has remained the same since 2021-22, coming in at £12,570 for the 2022-23 school year.
Above the personal allowance, you will be subject to a tax rate of either twenty percent, forty percent, or forty-five percent, depending on whether you pay tax at the basic rate, the higher rate, or both the basic and the additional rate. Your income will be used to calculate the rate that you will be required to pay.
The PAYE tax rates and thresholds for 2022-2023 are applicable throughout the United Kingdom with the exception of Scotland; an illustration of these can be found below. If you live in Scotland and are interested in learning more about the Scottish income tax, go through our comprehensive guide.
|Basic rate (20%)||£12,571-£50,270|
|Higher rate (40%)||£50,271-£150,000|
|Additional rate (45%)||£150,001+|
Be aware that your personal allowance will decrease by one pound for every two pounds that you earn in excess of one hundred thousand pounds.
In most cases, PAYE is distributed throughout the year in equal instalments. In the event that it is determined that you have paid an excessive amount of tax at the end of the year, HMRC will issue you a refund. In the event that you have underpaid your taxes, the government will send you a bill requesting further payment.
PAYE on your pension
In addition, persons who receive pension income are subject to taxation through the use of PAYE. You will receive “net” payment, which indicates that taxes will be deducted from the total amount.
Your pension provider, which is typically a pension scheme or annuity firm, will be the one to collect the tax that you owe and then send it on to HMRC. Additionally, any taxes that you owe will be deducted from the amount of your state pension by your pension provider.
HMRC will ask just one of your providers to withhold the appropriate amount of tax from your state pension payments if you get payments from more than one provider, such as a workplace pension and a private pension, for example.
The frequency of tax withholding is determined by how frequently you get paid.
Several things to keep in mind:
If your only source of income is from the state pension, you are required to file a tax return using the self-assessment method with HMRC.
If you continue to work while getting a state pension, your employer will deduct the amount of PAYE that you are required to pay from the wages that you receive. In addition, the employer will add the amount of PAYE that you earn from receiving the state pension.
It is your obligation to report any additional income that you receive, and you may be required to submit a tax return using the self-assessment method.
For additional information, please refer to our guidance on the types of people who are required to file tax returns.
When you are self-employed, you must pay PAYE.
It is standard practise for those who are self-employed to submit a self-assessment tax return once per year, as well as two “payment on account” instalments to HMRC in the months of January and July.
PAYE, or pay-as-you-earn, is an alternative method of tax payment that may be available to you depending on the specifics of your situation. This method ensures that your taxes are paid on time and eliminates the risk of missing a deadline.
If any of the following apply to you, you can use PAYE to pay your self-assessment bill:
Your tax bill totals less than £3,000 in outstanding debt.
If you are an employee or receive a corporate pension in addition to income from self-employment, you already pay tax through the PAYE system. This is the case whether or not you are self-employed.
You mailed in your tax return on paper by the 31st of October, or you filed your return electronically by the 30th of December.
If you are found to satisfy these requirements, the HMRC will automatically collect what you owe through the PAYE system, unless you specifically request that they not do so on your tax return. If you do not meet the requirements for eligibility in all three areas, you will be required to make your payment in instalments instead.
In this comprehensive guide on income tax for those who are self-employed, we cover everything it is necessary for you to understand.
The PAYE and your P60 are due.
At the end of each tax year, on April 5th, you will receive a statement from your employer or pension provider that is referred to as a P60. This statement will show the gross total amount of money you have been paid, the amount of tax that has been deducted, and the amount of income you have received after this has been deducted.
If you have had more than one job or more than one pension provider, each one of them is required to provide you a separate P60 End of Year Certificate.
Verify that you have paid the appropriate sum by going through all of the P60s that you have received. Check the results of the income tax checker service offered by HMRC and get in touch with the organisation to have your record updated if you believe you may have overpaid your taxes.
PAYE and your payslip
On your payslip, you will find not just the amount of PAYE tax that you have paid but also your PAYE tax code. This information will be shown alongside your National Insurance contributions and your student loan repayments.
The following illustration of a payslip displays the typical deductions that are taken out of an employee’s paycheck.
In this section, we will also discuss the types of deductions that are most likely to appear on your pay stub, including the following:
The preceding illustration shows that PAYE income tax is calculated at a rate of 20%, less a personal allowance that is equal to £12,570 (for the tax year 2022-2023). This is denoted by the tax code known as 1257L.
A pension contribution from the firm in the amount of £100 is also included in the payout.
Insurance on a National Scale
If your earnings are above a specific threshold, you will have a portion of each pay period taken out for national insurance. In the fiscal year 2022-23, the barrier will be £9,980 up until the 5th of July, and then it will increase to £12,570.
Despite the fact that certain payments, including contributions to a pension, qualify for relief from income tax, you will still be required to make payments for national insurance. It is not always the case that reimbursed expenses are exempt from national insurance, even if they are not subject to income tax.
If the reimbursement is a separate payment that is specifically aimed at reimbursing, or making a contribution towards, expenses that you have actually incurred, then the payment should be National Insurance-free. The exception to this rule is if the reimbursement is a lump sum payment that is specifically aimed at reimbursing, or making a contribution towards, expenses that you have actually incurred.
However, there are a certain costs that the National Insurance will never cover. If you drive your own car for work, you may be eligible for a mileage allowance up to the rates permitted by the HMRC. Members of the armed forces may also be eligible for operational and mess allowances, as well as council tax relief payments.
Learn more about the workings of this fee by reading up on national insurance and finding out more.
Contributions made to your employer’s pension system, including any voluntary payments, as well as contributions that will be transferred to a personal pension provider, could fall under this category.
As a result of the fact that these contributions are deducted from your pay “at source,” you are exempt from paying tax on them.
Student loan payback
It all depends on where you come from and when you did your schooling.
If you took out a student loan, the repayment plan that you are placed on will be determined by where you are from and when you attended school. There are four different repayment plans.
You will be required to begin making payments on your student loans under Plan 1 whenever your annual income reaches £20,195.
If you choose Plan 2, you won’t have to start making payments on your student loans until your annual income is higher than £27,295.
If you choose Plan 4, you won’t have to start making payments until your annual income is more than £25,375.
Once your annual income is greater than £21,000, you will be required to start making payments on your Postgraduate Loan if you are on a repayment plan.
If you are enrolled in plan 1, 2, or 4, you will be responsible for paying 9 percent of the additional amount of income you make above the threshold. If you are participating in the Postgraduate Loan repayment plan, you will be responsible for paying 6 percent of any earnings that are in excess of the threshold.
Learn more about the process of repaying your student loan here.
The remaining deductions
Deductions for other things could include payments made to a trade union, payments made in accordance with a court order to repay debts, or payments made to a child support agency.
Even though you have to pay income tax on the majority of your earnings (including holiday pay, overtime pay, bonuses, commissions, and tips), there are certain payments from your employer that are exempt from taxation.
These are excluded from the calculation of your taxable income and do not need to be reported even if you are required to fill out a tax return.
They are as follows:
costs that are paid back to you by your employer and for which the employer has a written arrangement (a “dispensation”) with HMRC
mileage allowance up to HMRC-approved rates reimbursed expenditures in situations where your employer has voluntarily entered into an agreement with HMRC to pay tax on your behalf reimbursed expenses (45p per mile for the first 10,000 business miles and 25p per mile thereafter) payments of up to £6 for additional household expenditures if you often work at home by arrangement with your employer if you use your own car for work and are eligible for a car allowance (your employer may pay more if you can supply evidence that it is justified)
personnel of the British Armed Forces are entitled to a number of allowances, including the operational allowance, which is given to those who are serving in conflict zones like Afghanistan; the mess allowance; travel to and from leave expenditures; and council tax relief payments.
Tax-free lump amounts
Extra payments from your employer, such as bonuses, are typically considered to be salary and subject to taxation in the same manner as regular income. On the other hand, certain lump-sum payments are not subject to taxation. These are the following:
money 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. 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. These include a tax exemption of up to £25 if paid to encourage or reward employees for special effort, as well as a tax exemption of up to £5,000 where paid to reward proposals that would save or make the business money.
You do not have to pay taxes on a genuine personal gift that your employer gives you, such as a wedding gift, but the burden of proof will be on you to demonstrate that the gift was given because of your personal circumstances and not because of your status as an employee.
In most cases, if there is no obligation to pay income tax on a one-time payment, there is also no obligation to pay National Insurance payments on that payment.
Finding solutions to your PAYE issues
In this section, we address some of the most frequently asked questions pertaining to PAYE.
If I haven’t paid the appropriate amount of PAYE, how will I find out?
After the end of the fiscal year on April 5, HMRC will issue you a tax calculation form P800. You should receive this form by the end of November at the very latest.
This will indicate the amount of tax that is due to be repaid, as well as the amount of tax that is owed for prior years.
You are more likely to be sent a P800 letter if any of the following apply to you:
After transitioning from one job to another, you were paid simultaneously by both of your employers within the same month, which resulted in a pay gap.
You are now getting a pension from your place of employment.
You were eligible for either the Jobseeker’s Allowance or the Employment and Support Allowance.
My tax obligations have not been met.
At the conclusion of the tax year, HMRC will often become aware of the fact that you have not paid a sufficient amount of tax through PAYE.
In order to make up for this, it will modify your tax code for the coming year, which will typically result in a lower personal allowance. This will cause you to be taxed on a greater amount of your income.
If you owe more than this amount, HMRC will expect a direct payment to cover the additional amount of tax that you owe. The maximum amount that can be collected in this manner is £3,000.
Taxpayers have the right to protest this payment in certain circumstances on the grounds that the relevant tax authorities were aware of all the particulars of the taxpayer’s earnings but did not act on them in a timely manner (Extra-Statutory Concession A19).
I feel like I’ve overpaid in taxes.
If the P800 form reveals that you have paid an excessive amount of tax, HMRC will often provide a tax refund to you in the form of a check that is mailed to you.
This payment should be sent to you by the beginning of September following the close of the tax year.
If you believe that you have overpaid in tax but HMRC has not returned you, you can make a claim for a refund by contacting them personally or submitting a claim online.
Why has my personal allowance been decreased due to deductions?
If your employer provides you with taxable benefits, such as a company car, a loan for more than $5,000, living accommodations, or medical insurance, the value of these perks is counted as additional income and taxed in accordance with the standard rates.
Your personal allowance will be decreased by HMRC in order to bring your monthly tax bill into line with current rates. This means that a greater share of your earnings will be subject to taxation on your part.
What happens if the amount of my deductions is more than my personal allowance?
Your tax code may be updated with a letter “K” and a number showing the amount of additional tax that you are required to pay if you have a history of paying less than the required amount of tax.
For example, if you receive a personal allowance of £12,570 but owe the government a total of £12,270 in taxes, your K code will be K25.
This is due to the fact that you have an outstanding debt of £300 greater than your personal allowance. Though you divide £300 by 12, which is the number of months in a year, you will find that you will be taxed as if you make £25 more per month than you actually do.
You will be subject to an additional tax liability of £300 throughout the course of the year in order to compensate for the deficit.