The Pay As You Earn System Explained

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The Pay As You Earn (PAYE) system is what employers use to deduct income tax and National Insurance (NI) contributions from an employee’s earnings before wages or pension is paid. If it is used to pay tax on wages or occupational pension, the same system can also be used to collect income tax on other taxable income.

How much tax will be deducted through PAYE will depend on the tax codes assigned to you. Tax codes are made up of letters and numbers, which refer to the type of allowance you are getting, and the amount of income you have as allowances that will be set against tax, respectively.

Your tax code will be shown in a notice of coding sent by the tax office, on your payslip, and on your occupational pension statement.

If a PAYE tax code is not yet available, the tax office will assign an emergency tax code, which will bear the letter L, showing that you are only receiving a personal allowance and nothing else. You stop being taxed on emergency code as soon as a PAYE tax code is assigned to you, or at the beginning of a new tax year.

HMRC may also use the PAYE system to collect the money you owe them. If you missed your tax payment, for example, they will deduct through PAYE. There is a limit to how much they can take, however. For example, they can only collect up to up to £3,000 per year if you earn less than £30,000 per year.

Think you’ve overpaid your tax, apply for your tax refund here

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