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What is PAYE?

Last reviewed: August 2022

Pay As You Earn (PAYE) is the HMRC system for taxing UK workers or those with other earnings.

Every worker gets a PAYE tax code which is used to determine how much tax to deduct from earnings, and these deductions are taken before your wage hits your bank.

In most cases, you don't have to do anything about it yourself. However, it's worth keeping tabs on how much tax is coming out of your pay.

It's possible for your HMRC tax code to be wrong, or for you to be owed a PAYE tax rebate on some of your work expenses if your employer doesn't reimburse you for them already. Keep reading to see how RIFT can help with this.

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What is PAYE Tax?How is PAYE Calculated?

In the UK, you're given a tax code that your employer will base your PAYE payments on. Your tax code lists the tax-free Personal Allowance that almost everyone gets. It also notes any other circumstances affecting the tax you pay. It's really important to make sure your tax code is correct. Having the wrong code can lead to you paying the incorrect Tax rates and therefore too much tax, or even missing out on your Personal Allowance altogether!

Once you’ve earned more than your tax-free Personal Allowance, your income above that starts to be taxed. The basic rate of tax is 20%, so that’s what your employer will take from your pay.

See here for more information about tax codes.

PAYE Tax Band System 2022/2023 (For England, Wales and Northern Ireland)

Band	Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Basic Rate	£12,571 to £50,270	20%
Higher Rate	£50,271 to £150,000	40%
Additional Rate	Over £150,000	45%

PAYE Tax Band System 2022/2023 (For Scotland)

Band	Income	Tax Rate
Personal Allowance	Up to £12,570	0%
Starter Rate	£12,571-£14,732	19%
Basic Rate	£14,733-£25,688	20%
Intermediate Rate	£25,689-£43,662	21%
Higher Rate	£43,663-£150,000	41%
Top Rate	Over £150,000	46%

What is the higher rate tax band?

The higher rate tax band is used for people on higher incomes. Once your income reaches the threshold for higher rate tax, things change. Any earnings above that threshold get taxed at the higher rate of 40%. It’s important to understand that you’re not losing 40% of your whole income, though. Only the top end of your pay will be taxed at the higher rate.

Example of how tax is calculated

James earns £18,000 per year and is paid every month (£1,500 per month before tax). He is on standard tax code 1257L and does not receive any other income.

This tax code tells James' employer that he is entitled to a tax-free allowance of £12,570 a year (£1,047.50 a month). Anything he earns over this amount will be taxed.

Annual Earnings

Annual Tax-Free Allowance based on 1257L Tax Code

Annual PAYE Tax Amount as a Basic Rate (20%) Taxpayer

£18,000 (£1,500 per month)

£12,570

(£1,047.50 per month)

£1,086 (£90.50 per month)

Calculation: Monthly salary of £1,500 less monthly tax-free allowance of £1,047.50 = £452.50. 20% of this amount works out at £90.50 per month and is taken as tax (*based on James not being entitled to any other taxable benefits and expenses or receiving any other income).

PAYE TaxPAYE Forms

The Pay As You Earn system (PAYE system) comes with a few forms you should get familiar with. Some of the most common ones are:

P60: this tells you how much you've earned what tax you've paid in a given tax year. Here's why your P60 is important.
P45: you get one of these when you leave a PAYE job. It's important if you have to prove you're owed a tax refund because you only worked for part of the year. Understand more about P45s here.
P11D: it's possible you might be getting extra "benefits" from your work, like health cover or company cars. If you are, P11D is the form your employer uses to report them.

PAYE TaxI'm self-employed. Do I pay PAYE tax?

In most cases, no. The PAYE scheme applies to people who are paid by an employer who deducts any tax owed directly from your wages.

If you're self-employed, you'll use the Self Assessment system to report your income and calculate your taxes.

If you have more than one job, in at least one of which is for an employer and one where you work for yourself, then you will need to pay tax under both schemes. This can get complicated due to how National Insurance and your Personal Allowance are calculated. It’s worth speaking to a specialist to get advice so that you don’t pay the wrong amount of tax in this situation.

However, it's worth noting that even if your employer sorts out the tax on your earnings through PAYE there are time when you might need to file Self Assessment returns. You can find out more here.

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PAYE RebateAm I Due a PAYE Tax Rebate?

At RIFT, over 80% of our tax rebate customers claiming for travel expenses are working PAYE.

There are lots of reasons why people on PAYE can be owed tax rebates. A lot of workers assume that all their tax is being taken care of through PAYE. As a result, they're missing out on money that ought to be back in their own pockets.

For example, one of the biggest things people lose out on is travel refunds. If you travel to temporary workplaces as part of your job, you're probably splashing out on fuel, food and even accommodation costs. All of these expenses, and more, can count toward a tax refund claim.

Tax rebates for PAYE workers won’t be handled automatically by HMRC and paid back to you automatically, since they won’t know what expenses you’ve had to pay from your own pocket. While self-employed people file a yearly Self Assessment tax return to show all their profits and expenses, there’s no such thing as a “PAYE tax return”.

To get a PAYE tax refund, you need to show the taxman exactly what you’ve been spending on the essential costs of your work.

For example, he won’t know that you’ve been using your own vehicle or public transport for travel to different workplaces. HMRC won’t even know if your employer hasn’t been giving you anything toward your essential costs unless you tell them.

RIFT is the UK’s leading expert in PAYE tax rebates, and that’s why claiming with us is the best way to claim your PAYE tax relief.

It won’t cost you a penny to find out what you’re owed. The average pay-out for the average 4-year PAYE tax rebate is £3,000 - and we’ll tell you straight away if you've got a claim.

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PAYE and PensionsPAYE Tax on your Pension

When HMRC’s working out whether you owe PAYE tax on your yearly income, those calculations include any money you’ve got coming in from pensions. That means:

The State Pension (under either the old system or the new one).
The Additional State Pension (if you qualify for that under the old system).
Any private pensions you get, whether workplace or personal.

If you’re getting more money in a year than the tax-free Personal Allowance you qualify for, you’ll be taxed through the PAYE system. If your total income’s high enough, you might even find yourself being taxed at the higher rate, or owing extra tax at the end of the tax year. You can also have to pay a tax charge if the combined value of your private pensions goes over the tax-free lifetime limit of £1,073,100. This tax will be taken off by your pension provider.

Higher Rate TaxI’m on the higher rate tax band. What does this mean for my PAYE tax rebate?

When you pay the higher rate of tax, it means you’re owed more back in your yearly tax refunds. Instead of claiming back 20% of your allowable expenses for things like essential work mileage, you’ll be pocketing 40%.

Naturally, the same rules apply to your tax refund, whichever tax rate you’re paying. The refund rules cover things like travel to temporary workplaces, upkeep or replacement of tools or uniforms and essential professional fees. All of these costs could be earning you a tax rebate of 40% if you’re earning enough to pay higher rate tax.

Need more help?

Wondering if you can claim a tax refund or need to submit a tax return? Use our online tools to find out if you're owed money by HMRC.

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What is PAYE?​