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This information applies to England, Wales, Scotland and Northern Ireland
What is the Pay As You Earn (PAYE) system
The Pay As You Earn (PAYE) system is a method of paying income tax. Your taxpayer’s employer deducts tax from your wages or occupational pension before paying you your wages. Wages includes sick pay and maternity pay. This means that you pay tax over the whole year, each time you are paid. Your employer is responsible for sending the tax on to HM Revenue and Customs (HMRC).
If you pay tax on your wages or occupational pension under PAYE, the PAYE system can also be used to collect the income tax of any other taxable income you have. For example, if you pay tax under PAYE on an occupational pension, the tax due on your state retirement pension is collected through PAYE by deducting tax from your occupational pension.
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How is PAYE calculated
The tax office will tell your employer how much tax to deduct from your wages/occupational pension, but will not give details about how your code has been decided. If the tax office does not have enough information to issue a full tax code, it will use an emergency tax code until more information is received and the tax can be adjusted (see under heading Emergency tax codes).
Most PAYE codes are made up of a number followed by a letter:-
- the letter relates to the type of allowance(s) you are getting (see below)
- the number shows the amount of income you have as allowances which may be set against tax (see below).
The letter in the tax code
The letter in the tax code, which shows which tax allowances you are receiving, will be one of the following:-
L if you are aged under 65 and getting the personal allowance. You will be given this code if you are a single person, the person in a married couple or civil partnership who is not claiming the married couple's allowance, or, if you are a person who is being taxed on the emergency code.
P if you are single person, or a married woman, aged 65-74 who is entitled to the full age related allowance.
V if you are a married man aged 65-74; and
- your wife is aged 74 or less; and
- you are entitled to the full age related allowance; and
- HM Revenue and Customs estimate that tax will be paid at the basic rate.
T may be allocated for a number of reasons. These include:-
- where you request it, because you do not want to reveal your actual code; or
- where you are eligible for Child Tax Credit but pay tax at the higher rate; or
- you or your partner is aged 75 or over; or
- there is a reduced age-related allowance in the code.
K if you are someone whose untaxed income adds up to more than your personal tax allowances. If your untaxed income is from fringe benefits and/or pensions, interest or social security benefits you may be given a K code.
Y if you are aged 75 or over and have the full personal allowance.
NT if you do not have to pay tax. This code does not include a number.
BR if you have not been given any allowances and tax will be deducted at the basic rate. This code may be given where you have more than one job.
DO if you have tax deducted at the higher rate.
OT no allowances have been given or remain after other adjustments have been made. Tax will be paid at the lower, basic or higher rate, depending on the level of income.
The number in the tax code
The number in the tax code represents the total of all available allowances, less any amount to be deducted to cover other income or benefits.
If you are given a PAYE tax code it will be shown on:-
- a notice of coding sent by the tax office (see under heading Notice of coding); or
- your payslip; or
- your pension statement if you are getting an occupational pension.
For more details on how tax codes are worked out, see PAYE: Understanding your tax code.
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Emergency tax codes
The tax office may not be able to give your employer a tax code to allow them to deduct the right amount of tax over the whole year. In this case, the tax office gives your employer an emergency code with which to tax you. An emergency code assumes that you are only entitled to the basic personal allowance and your PAYE tax code will include the letter L, which shows that you are only receiving this personal allowance. It does not take into account any other allowances and reliefs you may be entitled to.
You will stop being taxed on an emergency code:-
- when the tax office sends your employer (and you) a PAYE tax code, and details of previous earnings and tax paid for that tax year. This enables your employer to deduct the correct tax in future and refund any overpaid tax caused by the emergency code; or
- at the end of the tax year. Your employer will usually start deducting tax cumulatively, that is, when deducting tax your employer will take into account the amount of tax you have already paid. If, at the end of the tax year, you think you have paid too much tax because you have been taxed on an emergency code, you should claim a rebate by writing to the tax office.
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Notice of coding
A notice of coding shows your tax code if you are going to pay through the PAYE system. The notice is usually sent out in January or February for the tax year beginning on the following 6 April. The code shown in the notice is given for that tax year only. The notes that come with the notice of coding explain how the code is worked out.
Not everyone gets a notice of coding each year. It depends on what allowances and reliefs you are claiming and whether these tend to change from year to year. It is important to check that the notice of coding gives the correct allowances and reliefs, because if it is wrong you will be paying the wrong amount of tax.
For more information about your notice of coding, see PAYE: Understanding your tax code.
You should check carefully that you have been given all the allowances and reliefs that you are entitled to claim and that all your income has been taken into account. If help is needed you should consult a local tax office or an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.
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Self Assessment
Under the system of Self Assessment, you have to assess how much tax you have to pay on any income which you receive which is not taxed through PAYE, for example:-
- income from renting out a room; or
- income from freelance work.
You must tell the local tax office if you receive taxable income in addition to that which you pay through PAYE. You will then have to complete a tax return form and either ask HM Revenue and Customs (HMRC) to calculate how much tax is due (Revenue calculation) or do the calculation yourself (taxpayer calculation).
If you owe £2,000 or less in tax on sources of income which are not taxed through PAYE, and you send your completed tax return form back by the 30 September following the end of the tax year, you can pay all your tax through PAYE. If you owe more than this amount, or if you prefer, you can pay the tax due on the other sources of income directly to HMRC. To check the current amounts, contact your local tax office. You can find tax office contact details on the HMRC website at: www.hmrc.gov.uk/menus/contactus.shtm.
If you want to check that you are paying the right amount of tax, or, for example, if you think you may have over or underpaid tax, you should contact your local tax office and ask if you can complete a tax return form. Once you have completed the form you can either ask HMRC to calculate the amount of tax due, or do the calculation yourself.
For more information on paying tax directly to HM Revenue and Customs and Self Assessment, see Self Assessment - Your guide.
For help with checking a notice of assessment you should consult a local tax office or an experienced adviser, for example, at a Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, nearest CAB.
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Change in circumstances
If your circumstances change during the tax year, for example, you become entitled to a new allowance or incur a new outgoing, you must inform HM Revenue and Customs (HMRC) as soon as possible.
For more information about particular changes in circumstances, see Pay As You Earn - PAYE: common problems.
You cannot rely only on telling an employer of a change in circumstances. In fact, as an employer can do nothing until instructed by HMRC you do not have to inform your employer at all. You should write to your tax office with the details of the change.
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