What is PAYE?

EACH time you receive a payslip you probably notice a significant chunk has been deducted by the taxman.

But what exactly is being taken away and why?

Pay As You Earn (PAYE) is the system used by employers to pay income taxes to HMRCCredit: Alamy

What does PAYE stand for?

PAYE is an acronym that stands for Pay As You Earn.

Employers use the PAYE scheme to deduct tax from their employees’ pay slips.

As the title suggests, the amount of tax taken through PAYE varies depending on how much an employee earns.

PAYE is an HM Revenue and Customs’ (HMRC) system used to collect income tax and national insurance.

It’s the cash taken from your paycheck or pension every time you get paid.

PAYE deductions are paid to Her Majesty's Revenue and Customs (HMRC) — PAYE deductions are paid to Her Majesty’s Revenue and Customs (HMRC)

The system was introduced in the UK in 1944 as a way of collecting more tax from more people because of the financial strain of World War Two.

You can keep track of PAYE by checking your payslip, which will show your earnings, tax and national insurance contributions, as well as any other deductions from your wage.

Your employer is responsible for taking the tax from your paycheck and sending it to HMRC, meaning that as an employee it is taken care of for you.

HMRC uses a tax code to tell your employer how much tax to deduct from your wages or pension. Your tax code should be visible on your pay slip.

How much money is taken depends on how much you earn

Employers do not need to register for PAYE if their employees are paid less than £120 a week, receive benefits, have another job or get a pension.

You will receive a P60 form at the end of each tax year outlining the total sum paid to you and how much was deducted from your wage.

PAYE is paid by employees – if you are self-employed you pay through Self Assessment rather than PAYE.

Is PAYE the same as income tax?

PAYE is the name of the system that employers use to pay income tax to HMRC.

To most people, PAYE and income tax are the same thing.

However, PAYE does not just refer to income tax – it is also used to deduct your National Insurance, and other money owed to HMRC.

This might include overpaid tax credits, tax debts from previous years and unpaid self-employed national insurance contributions.

Those who are self-employed have to fill out their own tax returns, rather than having an employer deduct PAYE for them

Does everyone have to pay PAYE?

No – not everyone has to pay PAYE and, even for the majority of workers who do, the exact amount depends on their salary.

The amount of PAYE deducted from your pay slip is based on something called the Personal Allowance (PA).

Any income below the PA amount is income that you do not have to pay tax on.

The standard PA amount is currently set at £12,500 per year.

People earning between £12,501 and £50,000 must pay the “basic rate”, which is 20 per cent, while those making between £50,001 and £150,000 pay the “higher rate” of 40 per cent.