Employment Income & PAYE: How It Works

How Employment Income Is Taxed Through PAYE

PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance from employees. Your employer deducts tax from each pay packet based on your tax code, so by the end of the tax year you’ve paid roughly the right amount.^[1]

The system works in real time — your employer reports each payment to HMRC through RTI (Real Time Information) on or before each payday.

What Your Payslip Shows

A typical payslip includes:

• Gross pay — your total earnings before deductions
• Income Tax — deducted based on your tax code
• National Insurance — Class 1 employee contributions
• Pension — workplace pension contributions (if applicable)
• Student loan — repayments if you have a plan
• Net pay — what hits your bank account

Tax Codes

Your tax code tells your employer how much tax-free pay you get in each pay period. The standard code is 1257L, which gives you £12,570 tax-free per year.^[2]

If your code seems wrong, check it through your personal tax account or call HMRC. For a full breakdown, see our tax codes explained article.

When Employees Need Self Assessment

Even if PAYE handles most of your tax, you may still need to file a Self Assessment return if:^[5]

• Your total income exceeds £150,000
• You have untaxed income over £2,500 (rental income, freelance work, etc.)
• You receive taxable benefits not fully taxed through your code (company car, private medical)
• You want to claim employment expenses over £2,500
• You have multiple jobs and your tax codes don’t cover the right amounts
• You or your partner earn over £60,000 and claim Child Benefit

Employment Benefits (P11D)

Benefits in kind — like a company car, private medical insurance, or interest-free loans — are taxable. Your employer reports these to HMRC on a P11D form, and the tax is usually collected by adjusting your tax code.^[4]

Employment Expenses

If you spend your own money on things you need for work, you may be able to claim tax relief. Common claims include:^[4]

• Working from home — £6 per week flat rate if your employer requires it
• Uniforms and work clothing — flat-rate amounts by industry
• Professional subscriptions — if your job requires membership of a professional body
• Tools and equipment — if you must provide your own

P60 and P45 Explained

P60: Your employer gives you a P60 by 31 May each year. It shows your total pay and tax deducted for the tax year just ended. Keep it — you’ll need it if you file Self Assessment.^[1]

P45: You get a P45 when you leave a job. It shows your pay and tax to your leaving date. Give it to your next employer so they apply the right tax code. If you don’t have a P45, your new employer will ask you to complete a starter checklist.

Further Reading

• Tax Codes Explained — what the letters and numbers mean
• Working from Home Tax Relief — how to claim
• Personal Allowance & Tax Bands — current rates
• Employed & Self-Employed at the Same Time