Pay As You Earn
What you need to remember about PAYE
PAYE (short for Pay As You Earn) is a system of income tax deduction in the UK and some other countries. It is the primary method through which employees’ salary income tax and National Insurance contributions (NICs) are collected by their employers and paid to the government on their behalf. The PAYE system ensures that taxes are deducted directly from employees’ pay checks before they receive their net pay.
Real-Time Information (RTI)
How does Pay As You Earn pay tax?
Pay As You Earn (PAYE) is a system used in the UK to collect income tax and National Insurance contributions (NICs) from employees’ tax on salary or wages. It is an efficient way to ensure that taxes are deducted from an individual’s pay before they receive it, spreading the tax liability throughout the tax year.
Obtaining Tax Information and pay tax: When a person starts a new job, their employer will ask them to complete a new starter checklist or provide a P45 form from their previous employer. The P45 includes important tax information, such as the individual’s tax code and earnings details from the previous job. If the employee does not have a P45, the employer will use the tax code provided by HM Revenue and Customs (HMRC) to calculate tax deductions.
Calculating Tax Deductions: Based on the tax code and the employee’s earnings for the pay period, the employer calculates the amount of income tax to deduct. This calculation takes into account both the taxable earnings and the tax-free allowance allocated for the pay period.
National Insurance Contributions (NICs): In addition to income tax, pay self assessment tax, employers are also responsible for deducting NICs from employees’ pay. The amount of NICs deducted depends on the employee’s earnings and the applicable NICs rates.
Payslips and Payment: Employers provide employees with payslips that show the gross earnings, the deductions (income tax, NICs, and any other deductions), and the net pay (take-home pay). The net pay is the amount the employee receives after all deductions.
PAYE system simplifies the tax process for employees and ensures a steady flow of tax revenue for the government throughout the year. It also helps individuals avoid the burden of having to pay your tax large sums of tax at once. However, it’s essential for both employers and employees to stay compliant with tax regulations and report accurate information to HMRC.