The PAYE (Pay As You Earn) legislation system is a government set method of paying the income tax and NI (National Insurance) amounts. An employer will deduct tax and contributions from wages (or occupational pension package) before paying any pension or wage amount.

PAYE Basics

Wage amounts include ill or sickness pay, paternity, maternity and adoption pay. The tax owed over the year is paid throughout the year itself, instead of in a large lump sum. The employer is accountable for sending the required tax amounts to HMRC (Her Majesties Revenue and Customs). Each monthly (or weekly) payday, you will receive your pay slip, which will state the amount deducted from the wage total for NI contributions and tax, alongside any other deductions from the pay packet. If you receive a pension, then you might not receive a payslip for every payment date.

At the end of each tax year, a P60 form will be issued which will outline the total amounts paid to you while also highlighting what has been deducted from you. A tax year in the Untied Kingdom runs from the 6th of April to the 5th of April the following year.

If tax is paid from your occupational pension or wage under Pay-As-You-Earn, the system for PAYE can also be used in order to collect income tax or any further taxes that you have to pay, such as paying tax under PAYE on aforementioned occupational pensions or the tax due on your state retirement pension. The PAYE system can also be used to collect any tax due on other sources of income, for example, untaxed rent or interest. It can also be used in order to collect money that you owe Her Majesties Revenue and Customs, such as overpaid credits of tax, debts over taxes from years previously and unpaid self-employed contributions for National Insurance.

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