PAYE Explained
Pay As You Earn is the UK's system for collecting Income Tax and National Insurance directly from your wages. Your employer handles the deductions before you receive your pay.
What is PAYE?
PAYE stands for Pay As You Earn. It is the method most UK employees use to pay their Income Tax and National Insurance contributions. Rather than paying a lump sum at the end of the year, the tax is deducted from each payslip by your employer and sent directly to HMRC.
The system has been running since 1944 and covers around 31 million UK employees. Employers are legally responsible for operating PAYE correctly. They report payroll data to HMRC in real time using a system called RTI (Real Time Information).
How it works
Each pay period (weekly, fortnightly or monthly), your employer calculates your gross pay and then applies your tax code to determine the correct deductions. The standard code 1257L gives you £12,570 of tax-free income per year, spread evenly across your pay periods.
On a monthly payroll with code 1257L, you get £1,047.50 tax-free per month. Anything above that is taxed at 20% (basic rate) up to £3,726.17 per month, then 40% (higher rate) up to £12,500 per month, and 45% (additional rate) above that.
National Insurance is calculated separately. For 2025-26, employees pay 8% on earnings between £12,570 and £50,270 per year, and 2% on earnings above £50,270.
Real example
David earns £30,000 per year, paid monthly. Each month, his employer processes £2,500 gross pay through PAYE:
| Deduction | Monthly | Annual |
|---|---|---|
| Income Tax | £290.50 | £3,486 |
| Employee NI | £116.20 | £1,394 |
| Take-home pay | £2,093.30 | £25,120 |
David does not need to file a tax return because all his tax is collected through PAYE. If he had other income (rental income, dividends above £500, or self-employment), he might need to file a Self Assessment return as well.
Who does this affect?
All UK employees are on PAYE, including part-time workers, temporary staff, company directors and pensioners receiving occupational pensions. Self-employed people are not on PAYE and instead pay tax through Self Assessment. Contractors working through umbrella companies are on PAYE because the umbrella is technically their employer.
HMRC source
gov.uk/income-tax/how-you-pay-income-tax explains how PAYE works and what happens if you think your deductions are wrong.
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