What Is PAYE?
PAYE — Pay As You Earn — is the UK system for collecting income tax and National Insurance Contributions (NICs) directly from employment income before it reaches you. Your employer acts as a tax collector on behalf of HMRC, deducting the correct amounts each time you are paid and sending the money directly to HMRC.
For the vast majority of UK employees, PAYE means they never have to file a tax return. The system is designed to spread your annual tax liability evenly across each pay period so you pay a little at a time rather than a large bill at the end of the year.
Approximately 34 million people in the UK are taxed through PAYE. If you are an employee — whether permanent, temporary, part-time or on a zero-hours contract — you are almost certainly taxed this way.
How PAYE Is Calculated
Each time you are paid, your employer uses your tax code to calculate how much of your income is tax-free, then applies the correct income tax rates to the remainder. The calculation follows the cumulative basis: HMRC sums up all earnings and all tax paid since 6 April (the start of the tax year), and charges the tax due on the year-to-date total minus the year-to-date tax already paid.
This means the system self-corrects throughout the year. If you receive a pay rise in September, or have a month with no pay, PAYE automatically adjusts your deductions to ensure you end the year having paid the right total amount.
Example: You earn £35,000 per year, paid monthly (£2,916.67/month). Your personal allowance is £12,570, so £12,570 ÷ 12 = £1,047.50 is tax-free each month. The remaining £1,869.17 is taxed at 20% basic rate = £373.83/month in income tax. NI is charged at 8% on earnings between £1,047.50 and £4,189.17/month, giving approximately £249.74/month in NI. Total monthly deductions: around £623.57 — leaving take-home pay of approximately £2,293.10/month.
Understanding Your Tax Code
Your tax code tells your employer how much of your income is free from income tax. It is set by HMRC and communicated to your employer via a PAYE coding notice (P2). You can find your current tax code on your payslip, P60 or your Personal Tax Account at GOV.UK.
The most common tax codes in 2026/27:
| Code | What it means |
|---|---|
| 1257L | Standard code — personal allowance of £12,570. Most employees have this code. |
| BR | All income taxed at basic rate (20%). Used for a second job where the personal allowance is used elsewhere. |
| D0 | All income taxed at higher rate (40%). Used when all income falls in the higher rate band. |
| D1 | All income taxed at additional rate (45%). |
| NT | No tax deducted — rare, used in specific circumstances such as some non-UK residents. |
| K codes | A negative allowance — your untaxed income (e.g. from benefits in kind) exceeds your personal allowance. Tax is collected by increasing the amount taxed. |
| 0T | No personal allowance — income over £125,140, or a new job without sufficient information for a code. |
The number in a tax code is multiplied by 10 to give the tax-free allowance. Code 1257L means £12,570 tax-free per year. A code of 500L would mean only £5,000 tax-free — perhaps because of a benefit in kind like a company car that uses up part of the allowance.
Suffix letters indicate the type of allowance: L = standard personal allowance; M = Marriage Allowance transferred in; N = Marriage Allowance transferred out; T = there are other items HMRC needs to review.
Emergency Tax
If your employer does not have a valid tax code for you — typically when you start a new job without a P45, or HMRC has not yet issued a code — your employer applies an emergency tax code. This is usually 1257L W1/M1 (Week 1/Month 1 basis).
The critical difference with W1/M1 is that it taxes only the current period's earnings as if every pay period were the first of the year. It does not use the cumulative basis described above. This means it cannot account for periods of no pay or lower earnings earlier in the year, and often results in over-deduction of tax.
Emergency tax is corrected as soon as a valid P45 or a new code from HMRC is processed. If you've paid too much tax on emergency code, your employer will usually refund it in the same tax year by reducing future deductions. If the year has ended, HMRC will issue a P800 and arrange a refund.
How to avoid emergency tax: Always give your new employer your P45 from your previous job as quickly as possible. If you have lost your P45 or have never worked before, complete HMRC's Starter Checklist (formerly the P46) — this helps your employer apply a more appropriate code while waiting for HMRC to issue an official one.
P45, P60 and P11D — What They Are
P45 — Leaving Employment
Your employer must give you a P45 when you leave a job. It shows your tax code, total earnings and total tax paid in the current tax year up to your leaving date. There are three parts: Part 1 goes to HMRC, Part 1A is your copy, and Parts 2 and 3 go to your new employer. Keep your copy (Part 1A) safely — you may need it if you have queries about your tax for that year.
P60 — End of Tax Year Summary
Your current employer must provide a P60 by 31 May each year. It summarises your total earnings and total tax paid in the completed tax year (6 April to 5 April). It is important evidence of your income — keep all your P60s. You will need them for mortgage applications, tax refund claims, and to check you have paid the right amount of tax.
P11D — Benefits in Kind
If your employer provides taxable benefits — such as a company car, private medical insurance, or low-interest loans — they report these on a P11D form submitted to HMRC by 6 July after the tax year ends. You should receive a copy. The value of benefits in kind is added to your income for tax purposes, which may result in a change to your tax code for the following year or a Self Assessment requirement.
Overpayments and Underpayments
After the tax year ends, HMRC reconciles each employee's position by comparing tax actually paid to tax that should have been paid. This produces a P800 tax calculation, sent automatically to employees who are not required to file a Self Assessment return.
- If you've overpaid: HMRC will usually refund automatically — either directly to your bank account (if they hold your details) or by cheque. You can also claim proactively using your Personal Tax Account or by calling HMRC.
- If you've underpaid: HMRC will typically collect underpayments under £3,000 by adjusting your tax code in the following year, spreading the repayment. Larger underpayments may require a direct payment.
Common causes of overpayment include: being on emergency tax, leaving a job part-way through the year, or starting work in the latter part of the tax year. Common causes of underpayment include: multiple jobs where the personal allowance has been incorrectly split, or untaxed income that wasn't reported.
PAYE With Multiple Jobs
If you have two or more jobs, your personal allowance (£12,570) is typically allocated to your main job via code 1257L. Your second job will be coded BR (all earnings at 20% basic rate) or D0 if you are already a higher-rate taxpayer. This prevents you from claiming the personal allowance twice.
If your second job pays less than your personal allowance, you may be able to allocate some of the allowance to it by contacting HMRC and asking for it to be split. This can reduce your tax bill each month so you don't have to wait for a year-end refund.
How to Check and Correct Your Tax Code
Your tax code is set by HMRC based on the information they hold. Codes can be wrong if your circumstances have changed and HMRC haven't been updated. Always check your tax code when you change jobs, receive a new benefit in kind, or your income changes significantly.
You can view your current tax code and update your details via your Personal Tax Account at GOV.UK, or by calling HMRC on 0300 200 3300. If your tax code is wrong, HMRC will issue a corrected coding notice to your employer and the correction will be applied in your next pay period.