Last updated on:
March 17, 2024

PAYE, or "Pay As You Earn," serves as the system through which employees have their Income Tax and National Insurance contributions deducted directly from their wages by their employer, who then forwards these deductions to HMRC.

How PAYE Works

Under PAYE, your employer calculates and deducts the applicable taxes from your salary based on the tax code assigned to you. This calculation incorporates information from your P45 or, for those new to the workforce, the details provided in your New Starter Checklist. The process ensures that the correct tax amount is deducted before you receive your salary, and the total amount of tax paid on your behalf is reflected in the annual P60 form you receive.

Tax Rates Under PAYE

The Personal Allowance threshold, below which no Income Tax is paid, is set at £12,570. Beyond this allowance, the tax rates applied through PAYE are as follows:

  • 20% on earnings between £12,571 and £50,270
  • 40% on earnings between £50,271 and £125,140
  • 45% on earnings above £125,140

Additional Deductions via PAYE

Besides Income Tax and National Insurance, PAYE may also cover deductions for:

  • Student loan repayments
  • Pension contributions

Important Points about PAYE

  • PAYE primarily applies to employment income. Income from other sources, like self-employment, property rental, or Capital Gains, requires filing a Self Assessment tax return.
  • Pension income is also processed through PAYE, but may necessitate a Self Assessment in certain situations.

Individuals earning over £100,000 annually are required to file a Self Assessment tax return, even if their taxes are fully paid through PAYE, as per HMRC regulations.

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