PAYE
Pay As You Earn — the system by which employers deduct income tax and National Insurance directly from employees' wages before paying them, and remit the deductions to HMRC on their behalf. Your employer uses your tax code to calculate how much tax to deduct each pay period. PAYE means most employees do not need to submit a Self Assessment tax return unless they have additional untaxed income.
How it works
Your employer calculates PAYE cumulatively across the tax year, spreading your Personal Allowance evenly over each pay period and working out how much tax should have been deducted so far given your total pay to date. This is why a bonus or a missed payslip can temporarily push your deduction up or down, before the system self-corrects the following period.
In Scotland, employers apply an S-prefixed tax code, such as S1257L, so that payroll uses the Scottish income tax bands rather than the rates that apply in England, Wales, and Northern Ireland. The underlying PAYE mechanics — cumulative calculation, tax code driven, deducted automatically — are otherwise identical across the UK.
Because PAYE deducts tax as you earn, most employees never need to file a Self Assessment return. You typically only need to register separately if you have significant untaxed income on top of your PAYE employment, such as rental profits or self-employment earnings.
Example: how PAYE calculates a monthly deduction
Take someone earning £30,000 a year with no other income or adjustments to their tax code.
Their Personal Allowance of £12,570 is tax-free, leaving £17,430 of taxable income, all within the basic-rate band.
Tax due for the year is £17,430 × 20% = £3,486, which PAYE spreads evenly across 12 months as roughly £290.50 deducted each month.
Frequently asked questions
Why did my PAYE deduction change from one month to the next?
A bonus, a change in benefits, or a tax code update all shift the cumulative calculation, and PAYE automatically adjusts future deductions to keep your year-to-date tax roughly on track.
What if too much tax is deducted through PAYE?
The cumulative system usually self-corrects within the same tax year, but you can also claim back an overpayment via a P800 from HMRC or through Self Assessment if you file one.
Do self-employed people pay tax through PAYE?
No, self-employment profits are taxed through Self Assessment rather than PAYE, though someone who is both employed and self-employed still has PAYE applied to their employment income.
Related Terms
Tax Code
A code issued by HMRC to your employer to tell them how much income tax to deduct from your pay each period.
National Insurance
A system of compulsory contributions paid by employees, employers, and the self-employed that funds state benefits including the State Pension, Statutory Sick Pay, and Maternity Pay.
Self Assessment
The system by which individuals report their own income, gains, and reliefs to HMRC each year through an online or paper tax return, rather than having tax collected automatically under PAYE.
P60
An annual certificate your employer gives you at the end of the tax year (by 31 May) summarising your total pay and total tax deducted under PAYE for the year.
P45
A form your employer gives you when you leave a job, showing your tax code, total pay, and total tax paid in the current tax year up to your leaving date.
P11D
A form employers must submit to HMRC to report the cash equivalent of benefits in kind and expenses provided to employees and directors that are not put through payroll.
Try the calculator
Use our free tool to see how paye affects your tax.