Pay As You Earn — the UK system for deducting income tax and National Insurance from pay at source.
PAYE (Pay As You Earn) is the system by which UK employers deduct income tax and National Insurance contributions from employees' pay before it reaches them, and pay those deductions over to HM Revenue & Customs. The employer is the collection agent: the liability for getting it right, reporting it on time and paying it over sits with the business, not the employee.
For the tax year running from 6 April 2026 to 5 April 2027, the standard Personal Allowance is £12,570. The rates below apply in England, Wales and Northern Ireland; Scotland sets its own bands and rates for non-savings income.
One threshold matters disproportionately for payroll queries: the Personal Allowance is reduced by £1 for every £2 of adjusted net income above £100,000, reaching zero at £125,140. Employees crossing that line experience a marginal rate far above the headline 40%, and it is a frequent source of "my tax has gone wrong" tickets that turn out to be entirely correct.
| Band | Taxable income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
National Insurance runs alongside income tax on the same payroll but with its own thresholds, and it is charged per pay period rather than cumulatively — which is why a one-off bonus can carry a surprisingly large NI deduction. For a category A employee in 2026 to 2027, earnings up to £242 a week attract no contribution, earnings between £242.01 and £967 a week are charged at 8%, and earnings above £967 a week at 2%.
The employer pays secondary Class 1 contributions on top at 15%, above a secondary threshold of £96 a week. That employer contribution is a real cost of employment that never appears on the employee's payslip, and it is the figure most often missing from a naive salary-budget calculation.
An employee's tax code tells the payroll how much tax-free pay to apply. Codes are issued and changed by HMRC, not by the employer, and applying a code the employer thinks is right rather than the one HMRC has issued is a common and avoidable error. Where no code is available — a new starter with no P45 and no completed starter declaration — an emergency code applies on a non-cumulative basis, which typically over-deducts until the correct code arrives and the position corrects itself.
PAYE is a real-time system. Employers must report pay and deductions to HMRC in a Full Payment Submission on or before each payday — not monthly in arrears, and not after the fact. Late or missing submissions can affect employees' income-related benefits as well as attracting penalties for the employer.
The deductions themselves are paid over to HMRC by the 22nd of the following tax month if paying electronically, or by the 19th if paying by post. Small employers meeting HMRC's conditions may pay quarterly rather than monthly.
The employer operates PAYE and is responsible for deducting and reporting correctly, so HMRC will normally pursue the employer for under-deducted amounts. Where the employer applied the tax code HMRC issued and reported accurately, an underpayment is usually collected from the employee through a code adjustment instead.
An employer must register for PAYE and report in real time once any employee is paid at or above the relevant threshold, or receives benefits, or has another job or a pension. Even where no tax or National Insurance is due, records must still be kept — the reporting obligation is not the same as the deduction obligation.
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