PAYE Tax Explained

PAYE, which stands for Pay as You Earn, can be confusing when trying to make sense of how it's calculated and understanding your payslip. The following article will help you understand what PAYE tax is and how it all works.

What is PAYE Tax?

PAYE tax is the system where payments are made on Income Tax and National Insurance (NI). These payments are calculated by using different PAYE tax codes which are then applied by HMRC before you receive your payslip.

How does PAYE Tax work?

PAYE tax works by having a tax code on your payslip. This may come from either HMRC or the employer will use a standard code from HMRC. Your employer or pension provider will then use the tax code they worked out for you and take it off your weekly or monthly pay/pension.

How is PAYE calculated?

PAYE is calculated when you start a new job. To make sure you are on the right tax code, you’ll either hand over your P45 to your new employer or complete a HMRC new starter checklist. You can get this checklist from your new employer.

PAYE Tax Codes – Am I on the right one?

Most of the time, your tax code will be correct. The correct 2018/2019 tax code 2019 for most people should be 1250L. However, there are a few instances it can be incorrect.

Tax Codes:

If you think that your tax code is wrong, then you should check the code on your payslip. The main tax code that should be on your payslip is 1250L.

If you are not on this code, then the others are numbers ending in the following letters:

• P
• Y
• T
• K
• BR
• NT
• DO
• OT

In addition to these, there are a few different codes that could mean you are on an emergency tax code. These are identifiable as the code ends in the following: ‘W1’, ‘M1’ or ‘X’. If you see these on your payslip then you are on an emergency tax code and should try and get back on the correct tax code as soon as possible. To find out more about emergency tax, we have a great guide that goes into detail here.

PAYE Number Example

Your PAYE Reference number will be in the following format: 123/AB456. The first part (e.g. 123) is a 3-digit number that processes the company’s PAYE. The second part after the slash is the tax office’s reference to the employer (e.g. AB456).

Self-Employed PAYE Tax

If you are self-employed then you pay tax on your income through a Self-Assessment rather than the traditional PAYE. This results in having no tax code.

Although, this means that if you are self-employed, you are responsible for telling HMRC. This is for filing the Self-Assessment tax return each year and for paying other contributions.

It's important that if you stop being self-employed that you need to tell HMRC. This is because if you don't then you could be fined as you'll be still expected to file a tax return.

How do I claim overpaid tax back?

If you think that you have claim too much tax your previous payslips, then contact us today and we will give you a free estimate of how much you could claim.