PAYE, or Pay As You Earn, refers to the money that is taken from your wages to pay tax. The PAYE system is used to pay both your income tax and National Insurance. When you are paid, your employer will deduct your income tax and your National Insurance from your payslip and pay it to HMRC, which you will be able to view each month. In some cases there may be other payments in addition to these made from your payslip, these can include things like student loan repayments or pension contributions.
Every tax year you will be sent a notice of coding by HMRC and your employer will be sent a copy of you PAYE code. This code is used to determine the amount of income tax you pay on your earnings. It is important to remember that although your employer is sent your PAYE code, they are not told how that code is calculated. This means that your employer won’t know whether or not you are in the correct bracket and it is your responsibility to make sure you have the right code. Failure to do so may result in you paying more tax than you need to. If there are any errors and the wrong amount of tax is collected it is still up to the employee to pay any unpaid tax. This can be avoided by using the correct PAYE tax code therefore it is important to check and see if what you are paying is correct. If you think that something is wrong, you should contact HMRC who will issue your employer with a revised tax code.
Altogether PAYE is a three party process that involves HMRC, your employer (or pension provider) and you. HMRC will calculate and send your tax code to you. Your employer will then use your tax code to work out how much tax to take off of your weekly or monthly salary. This tax and National Insurance contribution is regularly paid by them to HMRC.
If you are confused or worried about whether or not you have been given the correct PAYE code, you can simply ask your employer what code they have been using or look at your most recent payslip to find out.
If you have any further questions about PAYE, or if you would like to learn more about Accountant Chelsea and how we can help you, you can visit our homepage here for more information.