Pay As You Earn (PAYE)

Wondering why so much of your hard-earned cash ends up going to the taxman on payday? Find out how PAYE works and if you're on the right tax code.

"PAYE is a method of paying income tax."

What does Pay As You Earn (PAYE) mean?

PAYE is a method of paying income tax. Your employer deducts tax from your wages each time you are paid and sends it on to HM Revenue and Customs (HMRC).

What about PAYE codes?

You'll find your PAYE code on your payslip – here's the lowdown:

Most are made up of a number relating to your allowances followed by a letter relating to the type of allowances you're getting.
The number is normally your personal tax allowance (this is the amount you can earn before you start paying tax), divided by 10. For example, for 2009–10 it usually would be 647, because the income tax allowance is £6475.
For most people under 65 the letter in the tax code will be 'L', which means that you're eligible for the basic personal tax allowance.
If your code is 'BR' with no number it means you have not been given any allowances and tax will be deducted at the basic rate from all income. This code may be given where you have two jobs, and your personal tax allowance is applied to your other job.

How do I get a tax code?

When you leave a job your employer should give you a form called a P45 – a document that has all your tax information which you present to your new employer when you start work.

If you've lost your P45, or don't have one because you're starting your first job, your employer will give you a form called a P46 to fill in and sign. They will allocate a temporary tax code and work out the tax due, probably using the emergency tax rate at first. After a few weeks you should be given a permanent tax code.

I've been given an emergency tax code – what does this mean?

If you don't have a P45 to give to your at the start of your employment you will get an emergency code. In this case, the tax code on your payslip will have suffix or prefix of either BR, X, WK1 or MTH1, and will also include the letter L.

Emergency tax means that you get only the basic personal allowance. However, unless you are entitled to any other allowances or tax relief, you shouldn't be paying any more than when your permanent tax code comes through.

You will stop being taxed on an emergency code either when the tax office sends your employer (and you) a PAYE tax code and details of previous earnings and tax paid for that tax year.

I think I've paid too much tax – can I reclaim it back?

Yes – wait until the end of the tax year (April), and if you think you've paid too much tax, you can claim a rebate by contacting your employer's tax office.

Jargon Buster

Income tax:: The amount of money taken from your wages that goes to the taxman to pay for services such as education and healthcare.
HM Revenue and Customs (HMRC):: Her Majesty's Revenue and Customs is the Government body responsible for enforcing tax laws and border control.
P45:: When you leave a job your employer gives you a form called a P45. It shows all your pay while you've been in that job and the tax you've paid so far in the current tax year.
Personal Allowance:: The amount of income you can receive every year without paying any tax on it. For 2009-10 the amount is £6475.

If you're still confused about your tax codes on your payslip, arrange a chat with your manager or HR department at work and ask them to explain it in more detail.
If you think you may be eligible for tax allowances and reliefs, check out DirectGov's guide. Read Advice Guide's more detailed breakdown to tax codes.
Advice Guide also provides useful information about common problems with PAYE.
To find out more about Income Tax, read TheSite.org's guide.
If your circumstances change during the tax year, e.g. if you become entitled to a new allowance or relief, you should inform HMRC – and your employer –as soon as possible.

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