How Does PAYE Work? UK Pay As You Earn Explained 2025-26
PAYE is the system most UK employees use to pay income tax and National Insurance. Here is exactly how it works, how your tax code affects your deductions, and what to do if your PAYE is wrong.
What Is PAYE?
PAYE — Pay As You Earn — is the system HMRC uses to collect income tax and National Insurance (NI) contributions from employees. Rather than employees calculating and paying their own tax at the end of the year, your employer deducts the right amount from each pay packet before it reaches your bank account.
PAYE covers the vast majority of UK workers: full-time employees, part-time employees, and workers on fixed-term contracts. If you are self-employed, you pay tax differently via Self Assessment. If you have both employed and self-employed income, PAYE handles the employed portion and Self Assessment covers the rest.
How Your Tax Code Works
At the heart of PAYE is your tax code. HMRC sends a tax code to your employer, and your employer uses it to calculate how much tax to deduct. Your tax code tells your employer how much of your income is tax-free each pay period.
The standard tax code for 2025-26 is 1257L. Here is what it means:
- 1257 — the number is your tax-free Personal Allowance (£12,570) divided by 10
- L — the letter indicates you are entitled to the standard Personal Allowance
If your code is 1257L and you are paid monthly, your employer treats £1,047.50 (£12,570 ÷ 12) of each month's salary as tax-free. Income above that is taxed at the appropriate rate.
Common Tax Code Suffixes
| Letter | Meaning |
|---|---|
| L | Standard Personal Allowance |
| M | Marriage Allowance — received 10% transfer from partner |
| N | Marriage Allowance — transferred 10% to partner |
| T | HMRC needs to review your code (various reasons) |
| BR | All income taxed at basic rate (20%) — often a second job |
| D0 | All income taxed at higher rate (40%) |
| D1 | All income taxed at additional rate (45%) |
| K | Negative allowance — you owe tax on a benefit or underpayment |
| NT | No tax to be deducted |
| 0T | No Personal Allowance (all income taxed) |
Scottish residents have tax codes beginning with S (e.g. S1257L), and Welsh residents have codes beginning with C (e.g. C1257L).
How Deductions Are Calculated Each Payday
PAYE operates on a cumulative basis throughout the tax year (6 April to 5 April). Each time you are paid, your employer's payroll software calculates total tax due for the year to date, then subtracts what has already been deducted, leaving the correct amount for this pay period.
This cumulative method means PAYE automatically corrects itself. If you had a pay rise part way through the year, or took unpaid leave in one month, the system adjusts over subsequent pay periods to ensure you pay the right total by 5 April.
Your payslip should show:
- Gross pay for the period
- Income tax deducted (PAYE)
- Employee National Insurance deducted
- Any pension contributions (if applicable)
- Student loan repayments (if applicable)
- Net pay
PAYE Thresholds and Rates 2025-26
| Band | Annual Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
National Insurance (employee Class 1) is deducted at 8% on earnings between £12,570 and £50,270 per year, and 2% on earnings above £50,270. NI is calculated per pay period, not cumulatively like income tax.
Why Your PAYE Tax Might Be Wrong
PAYE is automatic but not infallible. The most common reasons it goes wrong include:
- Multiple jobs: Your Personal Allowance is normally applied to one job only. A second job will typically use a BR code (20% on all income), which may under- or over-tax you depending on your total earnings.
- Benefits in kind: If your employer provides a company car, private medical insurance, or other taxable benefits, HMRC adjusts your tax code to collect the extra tax through PAYE. If the benefit value is estimated wrongly, your code will be off.
- Starting or leaving a job mid-year: Your new employer may use a Month 1 (emergency) basis until HMRC issues the correct code, which can over-tax you temporarily.
- Untaxed income or pension: If you receive income HMRC knows about (e.g. rental income, state pension), they may reduce your PAYE code to collect the tax through your employment.
- Previous underpayment: HMRC can add unpaid tax from a prior year to your code, spreading the debt over 12 months.
How to Check and Fix Your PAYE Code
You can check your tax code at any time by:
- Looking at your payslip — the code is printed on every payslip
- Checking your P60 (issued by your employer after each tax year) or P45 (when you leave a job)
- Logging into HMRC's Personal Tax Account at gov.uk/personal-tax-account
- Calling HMRC's income tax helpline: 0300 200 3300
If your code is wrong, contact HMRC with the correct information. HMRC will issue a new code to your employer, and your future deductions will be adjusted. Any overpaid tax is refunded either through your payslip (if the tax year is still open) or by cheque / bank transfer after the year end.
Frequently Asked Questions
What does PAYE stand for?
PAYE stands for Pay As You Earn. It is the system HMRC uses to collect income tax and National Insurance from employees directly through their employer, before the employee receives their pay.
What is the standard PAYE tax code for 2025-26?
The standard PAYE tax code for 2025-26 is 1257L. The number 1257 represents the Personal Allowance of £12,570 divided by 10. The letter L means you are entitled to the standard Personal Allowance.
Why might my PAYE tax be wrong?
Your PAYE tax may be wrong if you have multiple jobs, receive benefits in kind, changed jobs during the year, or HMRC has an incorrect tax code on record. You can check and update your tax code via your Personal Tax Account on the HMRC website.
How do I check my PAYE tax code?
Your tax code appears on your payslip, P60, or P45. You can also check and update it by logging into your HMRC Personal Tax Account at gov.uk/personal-tax-account, or by calling HMRC on 0300 200 3300.