What is PAYE?

In short

• Pay As You Earn: your employer deducts income tax and National Insurance before paying you, using the tax code HMRC gives them.
• It is a good estimate, not a final calculation. Mistakes creep in at job changes, second jobs, benefits and expenses.
• HMRC reconciles after 5 April and sometimes sends a P800.
• Expenses are never in PAYE unless you claim them.

How it works

1. HMRC issues your employer a tax code.
2. Each payday the employer applies the code to your pay to date and deducts tax and NI.
3. The employer reports it to HMRC in real time and pays it over.
4. After the year ends HMRC checks the total against what you should have paid.

Where it goes wrong

• Job changes. No P45 means an emergency code and lost allowance.
• Two jobs. The allowance sits against one; the other is taxed in full.
• Benefits. A company car or medical cover changes the code, often late.
• Expenses. PAYE has no idea you drive between clients.
• Gaps. Months without pay leave allowance unused.

PAYE against Self Assessment

Most employees never file a return. You need Self Assessment if you are self-employed, a CIS subcontractor, have expenses over £2,500 a year or untaxed income. How to register.

Worked example

A driver earns £30,000 on PAYE, tax £3,486. He also drives 8,000 miles a year to temporary depots. PAYE is correct for what it knows; the £720 of tax back on his mileage sits outside it until claimed.

Questions

What is a P60?

The year-end summary of your PAYE pay and tax. What is a P60.

Can I check what HMRC holds?

Your personal tax account shows every employer and payment. Create a Government Gateway ID.

Check my rebate