What is PAYE? A guide to PAYE for Employees

PAYE stands for Pay As You Earn and is the system used by the tax office (HMRC) to tax people who are employed, or receiving other income such as a pension.

PAYE tax is automatically collected by your employer and sent to the tax office every week or month. The amount of PAYE tax you pay is worked out by the tax code you are given.

Paying tax through pay as you earn means any income tax is deducted straight from your wages or other income before you are paid.

Understanding how the PAYE system works helps you calculate tax payable on your income, estimate your take home pay, and check your tax code, all of which assist in only paying the tax that you need to.

Are you due a PAYE tax rebate?

Paying tax by way of PAYE does not mean you can’t pay too much to HMRC, so don’t assume everything is right or it could cost you.

Every year hundreds of thousands of UK tax payers overpay income tax under PAYE. There are many reasons why you could have overpaid tax and be due a PAYE tax refund.

Some of the main causes of paying too much PAYE tax include:

• Not claiming back tax relief on expenses you have because of your job.
• You have left the UK.
• Having an incorrect tax code.
• Having more than one source of income.
• You are a UK non resident for tax purposes.

Tax refunds for employees with job expenses paid through the PAYE system will not be processed automatically because unless you make a claim HMRC is unaware of the expenses you have incurred or if you have been reimbursed by your employer.

Use our Tax Rebate calculator below to get a personalised estimate of how much tax relief you could be owed for a PAYE overpayment due to work expenses.

PAYE and your tax code

Your PAYE tax code is really important and lets your source of income know how much income tax to deduct from your earnings.

The tax office will tell your employer what your tax code is each tax year or when you have a change in circumstances.

To make sure you pay the correct amount of income tax an incorrect tax code is something to be avoided. A tax code which is too high means you can underpay tax and one too low can result in an overpayment.

You can learn more about PAYE tax codes in our PAYE tax code guide and how to change your code if you need to.

PAYE and your personal allowance

The personal allowance is generated by HMRC and given to all employees based on a number of tax associated circumstances.

Your personal allowance confirms how much tax free income you are allowed in that tax year and is used to create your PAYE tax code.

You can find out how much tax free personal allowance you have been given by HMRC by downloading the HMRC app or by checking your online personal tax account on desktop, mobile or tablet.

PAYE income tax rates and tax bands

HMRC income tax rates and tax bands are used to calculate how much tax is deducted from your PAYE income.

It’s helpful to know what tax band your income will fall into so you can figure out how much tax is payable on your income.

The income tax bands and rates for England, Wales & Northern Ireland are:

Personal allowance: £0 to £12,570 @ 0% tax rate.

Basic rate: £12,571 to £50,270 @ 20% tax rate.

Higher rate: £50,271 to £125,140 @ 40% tax rate.

Additional rate: Over £125,140 @ 45% tax rate.

Our PAYE income tax calculator is available so you can calculate an estimate of your take home pay after tax has been deducted.

The PAYE tax year

The PAYE tax year runs from the 6th April to the 5th April the following year. There is a time limit of four tax years for you to reclaim any over payment of income tax so it’s good to know when the tax year starts and stops so you don’t miss the deadline.

Common PAYE forms

If you are employed the most common PAYE forms you are given are:

• Form P60 – at the end of each tax year showing your total earnings and tax paid.
• Form P45 – if you leave your job.
• Form P11D – for people who have a company benefit like a health scheme.

Nearly all forms under PAYE are given to you by your employer or pension provider.

What is an employer PAYE tax reference number?

The PAYE tax reference number is not unique to you personally but is significant because it relates to the earnings you receive from your employer.

Being able to locate your employer’s PAYE reference number can be beneficial in various tax-related situations.

Typically a PAYE tax reference number begins with three digits representing a specific HMRC office, followed by a sequence of numbers and letters unique to the employer for example 123/A12345

Ways to claim your PAYE tax back from HMRC

The best way to claim PAYE tax back depends on the nature of your claim and your overall tax related circumstances.

HMRC expects you to know what you are entitled to and make a claim within the timescales for reclaiming overpaid PAYE tax back.

Some of the HMRC PAYE forms you can use to claim tax back include: 

P87 expenses of employment for reclaiming tax relief on allowable expenses incurred whilst at work.

P85 leaving the UK if you have left the UK within the last four qualifying tax years.

R40 to reclaim income tax paid on savings.

P50, P50Z or P55 if you have overpaid tax on a pension lump sum payment.

Always remember it’s your responsibility to ensure that you have not paid too much tax and in a lot of cases you will need to actively reclaim any overpaid tax directly from the tax office or you won’t  get your tax back.

HMRC debts and PAYE

If you owe tax HMRC can take money out of your pay to collect the money you owe them. They can do this by changing your tax code so that you pay more tax each month. There is a limit as  to how much can be claimed.

• If the amount owed is less than £50 for that particular tax year it’s usually written off by HMRC automatically.
• For amounts of underpaid tax of between £50 and £2,999.99 HMRC will typically recover the unpaid tax by adjusting your PAYE tax code for the following tax year.
• If the amount owed is £3,000 or more HMRC will require you to make a direct payment to them.

You can potentially set up an HMRC time to pay arrangement which will allow you to spread the cost of tax owed over an agreed period of time.