Key facts
- PAYE stands for Pay As You Earn — the UK’s system for collecting tax at source.
- Employers deduct Income Tax and National Insurance from employees’ pay each payday.
- PAYE applies to salaries, wages, bonuses, statutory payments, and occupational pensions.
- The system is based on tax codes issued by HMRC that tell the employer how much tax-free pay to allow.
- Over 30 million UK taxpayers have their tax collected through PAYE.
How PAYE Collects Tax from Employment Income
Pay As You Earn (PAYE) is the method used by HM Revenue & Customs (HMRC) to collect Income Tax and National Insurance contributions (NICs) from employees in the United Kingdom. Instead of paying tax in a single annual bill, employees have tax deducted from each wage payment throughout the year.[1]
The system was introduced in 1944 and now covers over 30 million employees and pensioners. It is the largest single source of government tax revenue, collecting hundreds of billions of pounds each year.
How the PAYE System Works
PAYE operates as a three-way process between the employee, the employer, and HMRC:[1]
- HMRC issues a tax code to the employer for each employee, based on the employee’s Personal Allowance and any adjustments
- The employer calculates deductions each payday using the tax code, PAYE tax tables, and NI thresholds
- The employer deducts tax and NI from the employee’s gross pay and sends it to HMRC
- The employer reports to HMRC in real time through RTI (Real Time Information) submissions
Key point: PAYE is designed so that by the end of the tax year (5 April), each employee has paid exactly the right amount of tax. If circumstances change mid-year (a pay rise, new job, or change in allowances), HMRC updates the tax code and the PAYE system automatically adjusts future deductions.
What PAYE Collects
Through PAYE, employers collect several types of deduction from employees’ pay:[4]
| Deduction | Who Pays | 2025/26 Main Rate |
|---|---|---|
| Income Tax | Employee | 20% basic, 40% higher, 45% additional |
| Employee NI (Class 1 primary) | Employee | 8% (PT to UEL), 2% above UEL |
| Employer NI (Class 1 secondary) | Employer | 15% above £5,000 |
| Student loan repayment | Employee | 9% above the relevant threshold |
| Postgraduate loan repayment | Employee | 6% above £21,000 |
Employers also use the PAYE system to pay Statutory Sick Pay, Statutory Maternity Pay, and other statutory payments, recovering part of the cost from HMRC.
PAYE vs Self Assessment
PAYE and Self Assessment are two different ways of collecting the same taxes:
| Feature | PAYE | Self Assessment |
|---|---|---|
| Who uses it | Employees and pension recipients | Self-employed, landlords, high earners, and others |
| When tax is paid | Deducted from each pay packet | Paid in lump sums (31 Jan and 31 Jul) |
| Who calculates | The employer, using HMRC tax codes | The taxpayer (or their accountant/software) |
| Reporting | Employer reports via RTI each payday | Taxpayer files annual tax return |
| National Insurance | Class 1 (employee and employer) | Class 2 and Class 4 (self-employed) |
Tip: Many people are on both systems. If you are employed but also have rental income, for example, your employment income is taxed through PAYE and you file a Self Assessment return for the rental income. HMRC may also adjust your PAYE tax code to collect small amounts of non-PAYE tax through your wages.
The Role of Tax Codes
Tax codes are the engine of the PAYE system. Each code tells the employer how much tax-free pay to allocate to the employee before deducting tax. The standard tax code for 2025/26 is 1257L, which gives a £12,570 Personal Allowance.[3]
If HMRC needs to collect extra tax (for example, to recover a benefit in kind or underpayment from a previous year), it reduces the tax code. If the employee is entitled to additional allowances, the code is increased. This keeps PAYE accurate throughout the year.
Who Is Covered by PAYE?
PAYE applies to:[2]
- All employees, including part-time and casual workers earning above the PAYE threshold
- Company directors, including single-director companies
- Occupational pension recipients (the pension provider operates PAYE)
- Workers receiving Statutory Sick Pay, Statutory Maternity Pay, or other statutory payments
PAYE does not apply to:
- Self-employed sole traders or partners (they use Self Assessment)
- Genuinely self-employed subcontractors (though CIS may apply in construction)
- Investment income such as dividends and interest (taxed separately)
Employer Obligations in Brief
As an employer, your PAYE duties include:[1]
- Registering as an employer with HMRC before your first payday
- Calculating and deducting Income Tax and NI each pay period
- Issuing itemised payslips to employees
- Reporting payroll information to HMRC via RTI (Full Payment Submission and Employer Payment Summary)
- Paying the tax and NI you have collected to HMRC by the 22nd of the following month
- Providing P60s at year end and P45s when employees leave
Frequently Asked Questions
Do all employees pay tax through PAYE?
Almost all employees have tax collected through PAYE. However, if your earnings are below the Personal Allowance (£12,570 in 2025/26) you will have a tax code that gives you all your pay tax-free. You are still within the PAYE system — HMRC simply instructs your employer not to deduct any tax.
Is PAYE the same as Income Tax?
No. PAYE is the collection mechanism, not the tax itself. Income Tax is the tax you owe on your earnings. PAYE is how that tax is collected in real time from your wages. Self-employed people pay the same Income Tax but through Self Assessment instead of PAYE.
Can I be on PAYE and Self Assessment at the same time?
Yes. If you have employment income and other income (such as self-employment, rental, or investment income), you will be on PAYE for your employment and file a Self Assessment return for your other income. HMRC gives credit for tax already collected through PAYE when calculating your Self Assessment bill.
Who operates PAYE — the employer or HMRC?
The employer operates PAYE on a day-to-day basis: calculating deductions, issuing payslips, and paying HMRC. But HMRC controls the system by issuing tax codes, setting rates and thresholds, and checking employer submissions through Real Time Information (RTI).
Further Reading
- How PAYE Works (Employer Obligations) — detailed guide to running PAYE as an employer
- How Tax Codes Work — understanding the numbers and letters in a tax code
- Registering as an Employer — step-by-step guide to getting set up with HMRC
- Real Time Information (RTI) Overview — how employers report payroll data to HMRC
- Statutory Deductions — Income Tax, NI, and student loan deductions explained
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Sources
- PAYE and payroll for employers — GOV.UK
- Income Tax: introduction — GOV.UK
- Tax codes — GOV.UK
- Running payroll — GOV.UK