PAYE (which stands for Pay As You Earn) is a way of paying your national insurance contributions and income tax without you as an employee having to do anything about it. As an employer, your payroll person or your accountant (if you use a payroll person, and if your accountant deals with payroll issues) will deduct the right amount of tax from your employees’ wages and make sure they are paid the correct amount. If you don’t have an accountant or payroll person to do this for you, it’s likely to be left up to you. But it’s not too hard a task if you use good accounting software, as this will do the sums for you.
If you pay your taxes using the PAYE system then at the end of every tax year you will receive a P60. This form shows you exactly what you were paid, and what was deducted for the previous tax year (a tax year starts on 6th April and ends on 5th April the next year).
PAYE can also be used to deduct tax on other sources of income, such as rent. And it can be used to pay the tax due on your pension, as a way to pay back tax credits that may have come to you in error, to pay previous tax debts, and unpaid self employed national insurance contributions.
PAYE is a handy tool for ensuring that anything you owe – or is owed to you – is paid. Using PAYE means that rather than paying your taxes in one lump sum at the end of year (and remembering to put money aside to do so), your tax is instead paid automatically every time you are paid, spreading the cost across the year. Of course, the employer is then responsible for paying the money to HMRC, and if they don’t they can get a hefty fine at the very least. But not to worry – your payslip will details everything you need to know about that month’s deductions and payments.
Wondering how the PAYE is worked out? It’s all to do with your tax code, that combination of letters and numbers that can be found on your payslip and P60. The letter at the beginning of the tax code relates to the type of allowance you can receive (for example, L means you were born after 5th April 1948, and you qualify for basic personal allowance. Y on the other hand means you were born before 6th April 1938, and you receive a full age-related personal allowance.
BR simply stands for ‘basic rate’. This is often the code given to the wages of a second job, or when you begin your first job, before your employer has been given your tax code.
Next come the numbers. The numbers determine how much of your income is an ‘allowance’ (ie not taxed).