What PAYE is for

Pay As You Earn (PAYE) is the system HMRC uses to collect Income Tax and National Insurance directly from most employees' wages, spreading the tax owed across each pay period rather than requiring a lump-sum payment at year end. Your employer calculates and deducts it automatically before you're paid.

Understanding your tax code

Your tax code tells your employer how much tax-free pay you're entitled to before deductions begin. The most common code, "1257L," reflects the standard £12,570 Personal Allowance. Different letters and numbers indicate adjustments — for example, if you have income from a second job, owe tax from a previous year, or receive certain benefits that affect your allowance.

Why tax codes go wrong

Tax codes can become inaccurate when you change jobs, start a second income source, receive a company benefit like a car, or HMRC simply hasn't updated your record after a change in circumstances. An incorrect code can mean paying too much or too little tax throughout the year, which usually gets corrected but can cause an unwelcome surprise if under-deducted tax is later reclaimed.

Checking and correcting your tax code

Your tax code appears on your payslip and P60. You can check what it should be, and query it if it looks wrong, through your personal tax account on GOV.UK or by contacting HMRC directly. Correcting an error promptly avoids a larger bill or a delayed refund building up over the year.

What PAYE doesn't cover

PAYE handles most employment income neatly, but it doesn't capture self-employment profits, rental income, dividends above the allowance, or significant capital gains — these generally require registering for Self-Assessment separately, even if you're also employed and taxed under PAYE for that income.

Key takeaways

  • PAYE automatically deducts Income Tax and National Insurance from most employment income.
  • Your tax code determines how much tax-free pay you get before deductions.
  • Job changes and additional income sources are common causes of an incorrect tax code.
  • Income outside PAYE — self-employment, rental income, and similar — usually needs separate reporting via Self-Assessment.