PAYE: how tax is taken from wages and pensions

PAYE, or "pay as you earn", is the system by which income tax is deducted from your salary or pension before you receive it¹. Your employer, or your pension provider, works out how much tax and National Insurance you owe, takes it from your pay before it reaches you, and sends the money to HMRC². Introduced in 1944, this is now the way most employees pay income tax¹.

The whole system runs on your tax code: a mix of numbers and letters that tells your employer how much tax to take from what you have earned, before you are paid³. HMRC issues the code, your employer applies it, and the result appears on your payslip every time you are paid. At the end of the tax year you get a P60 summarising the whole year, and when you leave a job you get a P45 to pass to your next employer.

How PAYE works: tax and National Insurance taken before you are paid

Under PAYE, the tax and National Insurance you owe are worked out and removed from your wages before you are paid². If you work for an employer during term-time, any income tax and National Insurance due will be deducted from your wages before you receive them⁷. What lands in your bank account is your net pay: what is left after the deductions.

The mechanics are simple from your point of view. HMRC issues a tax code to your employer or pension provider, and that code is used to work out how much tax to deduct from the payments made to you⁴. The employer does the calculation, takes the money, and sends it to HMRC⁵. You do not need to do anything for the tax itself to be paid, which is why PAYE is described as the most common method of paying income tax if you are employed⁵.

The legal footing for all this is the Income Tax (Earnings and Pensions) Act 2003, which provides for the assessment, collection and recovery of income tax on employment, pension or social security income that counts as PAYE income⁸. In practice that means wages, occupational pensions and most other regular payments from an employer or pension provider are collected at source, rather than through a bill you pay later.

Not everything that looks like pay is taxed the same way. Some payments, such as certain termination payments, are only partly taxed through PAYE, and some income, such as self-employed profits, sits outside PAYE altogether. Those cases are covered later in this page.

Who pays tax through PAYE: wages, workplace pensions and private pensions

PAYE covers anyone whose income is paid to them by an employer or a pension provider. That includes employees, workers paid through an employer, and people receiving a company pension¹. It also covers private and workplace pension payments, which are taxed at source by the pension provider in the same way wages are taxed by an employer.

The two systems overlap more than people expect. Around 7 million Self Assessment taxpayers also have PAYE income because they are employed or receive a pension⁹. Someone can be an employee, taxed through PAYE on their salary, and also file a Self Assessment return for rental income or self-employed earnings. From April 2029, Self Assessment taxpayers with PAYE income, such as from employment or a pension, will need to pay towards their Self Assessment tax bill through their PAYE income where they have enough income to do so, with HMRC updating their tax code to determine how much is collected⁹.

Some less obvious payments also go through PAYE:

• Pension death benefits: tax on trivial commutation lump sum death benefit payments is deducted through PAYE¹⁰.
• Employee share schemes: under a Share Incentive Plan, you pay income tax and National Insurance contributions under PAYE on capital receipts received within 5 years of the shares being awarded, or within 3 years for dividend shares¹¹.
• Umbrella company workers: in most cases the umbrella company employs you and pays your wages through PAYE, though it does not find temporary work for you¹².
• Termination payments: tax and National Insurance are payable on the part of a termination payment equivalent to what you would have earned if you had been working, covering pay in lieu of notice, gardening leave pay and post-employment notice pay¹³.

If HMRC needs to collect money from you through PAYE rather than sending a bill, it can adjust your tax code. For example, for PAYE customers, HMRC will automatically collect Pension Age Winter Heating Payment charges through a change to the customer's tax code¹⁴.

How your tax is worked out: pay, personal allowance and tax code

The amount of tax taken from each payment depends on two things: how much you are paid, and your tax code. PAYE is calculated based on how much money you earn and whether you are eligible for the personal allowance⁵. Your tax code is made up of both numbers and letters, depending on your circumstances and your tax-free allowances⁴.

The code exists to spread your tax-free allowance across the year. The numbers in the code represent the allowance your employer can apply before taxing your pay, and the letters describe your situation. Your employer or pension provider uses the code to work out how much tax to deduct from the payments they make to you⁴. The code is shown on every payslip, so you can see at a glance what is being applied².

Your code can become more complex than a simple allowance. Common factors that make a code more complicated include taxable state benefits, which include the state pension, other employments or other pensions, and underpayments of tax from previous years⁴. In each case the code is adjusted so that extra tax is collected, or less tax is taken, through the year rather than through a separate bill.

You can find your tax code in several places: on HMRC's website by signing up to view your Personal Tax Account, on letters or emails from HMRC, on your payslips, or by contacting HMRC⁴. One in seven PAYE taxpayers has now used the HMRC app to check their pay before it lands in their bank account¹⁵.

Where a person has more than one job or pension, or both an employment and a pension, each job or pension has its own tax code, and each code is used by the employer or pension provider to work out how much tax to deduct from the payments they make⁴. Only one employer uses the 1257L tax code at any one time, so other sources of income are taxed differently⁶. The dedicated pages on tax codes and two jobs and two tax codes cover how the allowance is split.

Some HMRC services depend on your code. To check your tax on dividends and interest from savings using HMRC's online service, you need to have tax code 1257L¹⁶. The pages on dividend tax and how savings interest fits into your income tax explain how that income is taxed.

Scottish taxpayers and the 'S' tax code

If you pay Scottish Income Tax, you will have an 'S' at the beginning of your tax code¹⁷. Scottish Income Tax applies to your wages, pension and most other taxable income¹⁸, including self-employed profits, rental income and taxable benefits such as the State Pension and Carer's Allowance¹⁹.

The rates and bands are set by the Scottish Parliament²⁰. The power to set band thresholds as well as rates came under the Scotland Act 2016 and took effect from 6 April 2017, applying to all non-savings, non-dividend income of Scottish taxpayers²⁰. Savings and dividend income continue to be taxed using UK rates, which is why the distinction matters.

Who counts as Scottish is based on where you live, not where you work. The definition of a Scottish taxpayer is based on where an individual resides in the course of a tax year, and Scottish taxpayer status applies for a whole tax year²¹. You pay Scottish Income Tax if you move to Scotland and live there for a longer period than anywhere else in the UK during a tax year, which runs from 6 April to 5 April the following year²².

If you move to or from Scotland mid-year, the tax taken from your wages or pension will be adjusted automatically so you pay the right amount across the whole year²². You do not need to do anything yourself, but it is worth checking your first payslips after a move.

The scale of the system is large. In 2024 to 2025, 90.1% of Scottish non-savings, non-dividend income tax liabilities were collected through the PAYE system, compared with 87.5% of liabilities in the rest of the UK²¹. For most Scottish taxpayers, then, PAYE is not just one way of paying: it is how the tax is actually collected.

Payslips: what your employer must give you

Your employer must provide you with a payslip, and payslips must be provided on or before payday²³. The same rule appears in HMRC's guidance on tax codes: your employer must give you a payslip on or before payday²⁴. Employers can choose whether they provide printed or electronic (online) payslips²³.

A payslip shows the key numbers in the PAYE process: your tax code, your gross pay (your pay before any tax has been taken), the income tax and National Insurance taken off, your net pay, and your workplace pension payments². It must show your earnings before and after any deductions²³.

Employers must also explain any deductions fixed in amount, for example repayment of a season ticket loan. They can do this either on the payslip or in a separate written statement, and that separate statement must be sent out before the first payslip and updated every year²³.

Not everyone is entitled to a payslip. Employers do not have to provide one if you are not an employee or worker, for example a contractor or freelancer, if you are in the police service, if you are a merchant seaman, or if you are a master or crew member working in share fishing, paid by a share in the profits or gross earnings of a fishing vessel²³.

Payslips are more than a courtesy. They can be used as proof of your earnings, tax paid and any pension contributions²³, which matters when applying for a mortgage, a loan or benefits. They also carry your employer's PAYE number, which you can find on payslips, P60s, P45s and P11Ds, and which The Pensions Regulator asks for if you need to report concerns about your workplace pension²⁵.

Deductions from your pay beyond tax and National Insurance

Tax and National Insurance are usually the biggest deductions, but not the only ones. Workplace pension contributions are taken from your pay, and how the tax relief works depends on the arrangement your scheme uses.

Under relief at source, your employer takes your pension contribution from your pay after deducting tax and National Insurance, and your pension scheme provider then claims the tax back from the government at the basic rate of 20 per cent²⁶. Under a net pay arrangement, your employer takes your pension contribution and the government's contribution as tax relief from your pay before deducting tax, so you pay tax on what is left²⁶. The difference matters most if you do not pay tax at all: under a net pay arrangement, if you do not pay tax, you do not get tax relief, for example because you earn less than the tax threshold²⁶. Staff who do not pay income tax will not get tax relief whichever tax relief method the scheme uses²⁷.

Other deductions and payments work differently:

• Termination payments: you pay tax and National Insurance on the part of your termination payment equivalent to what you would have earned if you had been working¹³. If the amount of post-employment notice pay is more than the total of any severance, enhanced redundancy or non-cash benefits you receive, you only pay tax on the amount you actually get¹³. The page on redundancy pay and the £30,000 exemption covers this in detail.
• Share schemes: income tax and National Insurance under PAYE apply to capital receipts within the early years of a Share Incentive Plan award¹¹. See benefits in kind for how perks are taxed.
• The High Income Child Benefit Charge: if you previously completed a Self Assessment tax return only to pay the charge, you can choose to pay it through PAYE instead, by contacting HMRC by phone to leave Self Assessment and register for PAYE payment²⁸.
• Scottish winter heating payment charges: for PAYE customers, HMRC will automatically collect payments through a change to the customer's tax code¹⁴.

Fixed deductions, such as season ticket loan repayments, must be explained by your employer, either on the payslip or in a separate statement²³. Student loan repayments are also collected through PAYE; the page on student loan repayments explains how they appear on your payslip.

Your P60: a yearly summary of pay and tax

At the end of each tax year, which closes on 5 April, you receive a statement called a P60 from your employer or pension provider¹. It summarises your pay and the tax deducted across the whole year, and it is the document most people reach for when they need proof of earnings, for example for a mortgage application or a benefit claim.

The tax year runs from 6 April to 5 April⁶. Your P60 covers that full period, so it arrives after 5 April, once the year has closed. If you have both an employer and a pension provider, you can receive more than one P60, one from each, because each payer deducts tax separately under its own tax code.

Keep your P60 somewhere safe. It is one of the documents HMRC points to as evidence of earnings and tax paid, and your employer's PAYE number appears on it, which is useful if you ever need to report a workplace pension concern to The Pensions Regulator²⁵. Your pay and tax details for the year are also visible in your HMRC online account, so a lost paper copy is not the end of the world, but the P60 remains the standard yearly record.

Who is not taxed through PAYE

Not everyone's income goes through PAYE. The clearest case is the self-employed: if you are self-employed, you pay income tax through Self Assessment⁵. There is no employer to deduct tax from self-employed profits, so they are taxed through a return instead, as explained on how self-employed income is taxed.

Some people fall outside PAYE for other reasons:

• Students in holiday jobs: if you are a full-time student with a holiday job, you may not need to pay tax through PAYE, though you will still pay National Insurance, if you are only working in the holidays, return to full-time education afterwards, and your total income for the year is below the personal allowance⁷.
• People with untaxed income: if you get any income that is not being taxed through PAYE, you will need to let HMRC know by doing a Self Assessment tax return².
• Simple Assessment cases: HMRC sends a Simple Assessment tax bill, also known as a PA302, if you did not pay enough tax and they could not collect it through your tax code³⁰. The letters are sent to those who have tax to pay on income that has not been taxed through PAYE or Self Assessment³¹. See Simple Assessment.
• Contractors and freelancers: employers do not have to give payslips to people who are not employees or workers, such as contractors and freelancers²³, reflecting that their tax is not collected as employment income.

Where PAYE and Self Assessment meet, the rules can interact. If you have both PAYE and Self Assessment income and claim a refund on a pension death benefit lump sum, HMRC will not include any Self Assessment income in calculating your repayment unless you ask them to do so³².

When your tax code or P60 is wrong: checking and appealing

PAYE only works if HMRC has the right information. If HMRC does not have accurate information about your income, you may be issued with an incorrect tax code⁴. HMRC states that keeping it informed of changes that may affect your tax position allows it to adjust your tax code, and that reviewing your tax code keeps the tax deducted as accurate as possible⁴. The page on how to check your tax code walks through this.

If the year has already ended and the wrong amount was taken, HMRC contacts you. A P800 tax calculation letter tells you whether you owe tax or are owed a refund. If your P800 shows you owe tax, HMRC will usually change your tax code for the following year so they can collect the money that way²⁹. If you have overpaid, the page on claiming a refund when you have overpaid income tax sets out the process.

You have routes to challenge HMRC:

1. Contact HMRC about your tax code. An individual may object to a tax code adjustment by contacting HMRC or by making a formal objection under regulation 18 of the PAYE Regulations³³.
2. Disagree with a correction notice. If HMRC issues a revenue correction notice, you can disagree with it, and supporting evidence such as payslips, P60s, invoices or Construction Industry Scheme deduction statements may help show why the correction is wrong, though evidence is optional³⁴.
3. Escalate. If HMRC will not change its position, the page on HMRC internal review or the tax tribunal explains the routes to challenge a decision, and how to complain about HMRC covers the complaints process.

Emergency tax codes are a common cause of wrong deductions. Codes ending in W1, M1 or X mean you are on an emergency tax code³. HMRC may apply one if it does not have enough details about how much tax you need to pay, most commonly when you have just started working for a new employer³⁵. Emergency tax codes are applied automatically, but only as a temporary measure, and the code is shown on your payslip, usually near your National Insurance number³⁵. It switches to the right code once HMRC has all the right tax information, and any overpaid tax is refunded, usually via your next payslip or a rebate from HMRC². However, the 1257 tax code does not take into account any backlog of allowance that may be due to you, for example after a period on the wrong code³⁵. See emergency tax codes.

For free, impartial help with checking your tax position, HMRC's own guidance and the HMRC app are the starting points, and TaxAid publishes independent guidance on reviewing tax codes⁴. The pages on using the HMRC app and your online account and on fake HMRC calls, texts and emails cover the tools and the scams to avoid.