What is PAYE (Pay As You Earn)?
PAYE (Pay As You Earn) is the UK system that requires employers and pension providers to deduct income tax and National Insurance from each pay packet before it reaches you, then remit it to HMRC each month. Your tax code tells the payer how much tax-free pay to apply.
Detailed definition
PAYE was introduced by Chancellor Sir John Anderson in April 1944 to collect wartime income tax efficiently from a workforce that had grown twentyfold since the previous Edwardian-era system was designed. The idea was simple: instead of asking each worker to save up a year's tax and pay it in a lump sum, the employer should withhold a slice each payday and forward it to the Exchequer. Modern PAYE follows the same principle but runs on Real Time Information (RTI), introduced in April 2013, under which every payment to an employee is reported to HMRC by the payroll system on or before the pay date.
The mechanism rests on the tax code. HMRC issues each individual a code (for example 1257L) that translates the Personal Allowance, plus or minus any other adjustments, into a number the employer's payroll software can apply each pay period on a cumulative basis. The code is shorthand: 1257 represents GBP 12,570 of tax-free pay, the L suffix says the employee is entitled to the standard Personal Allowance. The cumulative basis means each pay period brings the year-to-date deduction up to where it should be, so refunds and underpayments self-correct without any action from the employee.
PAYE collects income tax (at the marginal rate for each band), Class 1 National Insurance from the employee, student loan repayments (when the threshold is crossed), and the High Income Child Benefit Charge (via tax code adjustment for income GBP 60,000 to GBP 80,000). Employers also pay Class 1 Secondary NI at 13.8 percent on earnings above the Secondary Threshold of GBP 5,000 (the Autumn 2024 Budget change). All of this is reconciled annually via the P60 issued by 31 May after the tax year ends.
How it works: tax codes and bands
Standard 2026/27 tax code = 1257L (GBP 12,570 free)
Income tax bands (England, Wales, NI):
0% GBP 0 to GBP 12,570
20% GBP 12,571 to GBP 50,270
40% GBP 50,271 to GBP 125,140
45% Above GBP 125,140
Employee NI (Class 1):
0% Up to GBP 12,570
8% GBP 12,571 to GBP 50,270
2% Above GBP 50,270
Common tax codes:
1257L = standard PA
BR = all income at basic rate (used for second jobs)
D0 = all income at higher rate
D1 = all income at additional rate
NT = no tax
K### = negative allowance (taxable benefit exceeds PA)
0T = no PA (used when HMRC cannot determine code)
W1/M1 = non-cumulative ("emergency") basis
Scotland uses six bands with different rates set by Holyrood.
Worked example
Sarah earns GBP 45,000 in England in 2026/27, paid monthly. Her tax code is 1257L. Here is one month's payslip:
- Gross monthly pay: GBP 45,000 / 12 = GBP 3,750.
- Tax-free pay this month: GBP 12,570 / 12 = GBP 1,047.50.
- Taxable pay this month: GBP 3,750 - GBP 1,047.50 = GBP 2,702.50.
- Income tax at 20 percent: GBP 540.50 (entirely within basic rate, since GBP 45,000 < GBP 50,270).
- NI threshold this month: GBP 12,570 / 12 = GBP 1,047.50.
- NI-able pay this month: GBP 3,750 - GBP 1,047.50 = GBP 2,702.50.
- Employee NI at 8 percent: GBP 216.20.
- Total deductions: GBP 756.70.
- Net (take-home) monthly pay: GBP 2,993.30.
PAYE vs Self Assessment
The two main routes for paying UK income tax solve different problems. PAYE handles regular, predictable wage and pension income; Self Assessment handles everything else and acts as the reconciliation backstop.
| Aspect | PAYE | Self Assessment |
|---|---|---|
| Who pays the tax | Employer / pension provider deducts and remits | Individual calculates and pays HMRC directly |
| Reporting frequency | Every pay period via RTI | Annual tax return (online by 31 January, paper by 31 October) |
| Best for | Single-employer wage income, pensions | Self-employed, rental income, dividends > GBP 10,000, untaxed foreign income, high-net-worth individuals |
| Reconciliation | Annual P60 and automatic P800 if discrepancy | SA302 calculation submitted by taxpayer |
| Penalty for missing | Employer faces RTI penalties; employee usually unaffected | GBP 100 fixed plus escalating penalties beyond 3, 6, 12 months late |
You generally need to file Self Assessment if you earned more than GBP 1,000 self-employed, more than GBP 2,500 untaxed (rental etc.), more than GBP 10,000 in dividends or savings, owe Capital Gains Tax, or were paid the High Income Child Benefit Charge. PAYE alone handles the rest.
Related terms
Related calculators on 3Tej
See your take-home pay and check your tax code with these free UK calculators:
Frequently asked questions
What is PAYE and how does it differ from Self Assessment?
PAYE is the system by which UK employers and pension providers deduct income tax and National Insurance from each pay packet on HMRC's behalf. Self Assessment is the annual return individuals file when they have income outside PAYE (self-employment, rental, large investment income, untaxed foreign income) or owe tax that PAYE has not collected. Most UK employees never file Self Assessment because PAYE has already settled their liability in real time.
What does the standard 1257L tax code mean for 2026/27?
1257L means your employer should apply GBP 12,570 of tax-free Personal Allowance across the tax year, spread equally over your pay periods (so roughly GBP 1,047.50 per month or GBP 241.73 per week). The letter L indicates a standard Personal Allowance entitlement. Other suffixes carry different meanings (M for Marriage Allowance recipient, N for transferor, T for code requiring HMRC review, K for negative allowance).
What are the 2026/27 PAYE bands for England, Wales, and Northern Ireland?
For 2026/27 the rUK income tax bands are: 0 percent on income up to GBP 12,570 (Personal Allowance), 20 percent basic rate from GBP 12,571 to GBP 50,270, 40 percent higher rate from GBP 50,271 to GBP 125,140, and 45 percent additional rate above GBP 125,140. Employee National Insurance is charged on top: 8 percent between GBP 12,570 and GBP 50,270 and 2 percent above. Scotland uses six bands with different rates.
Why has my tax code changed mid-year?
HMRC adjusts tax codes mid-year when your tax-free entitlement changes. Common triggers include starting or stopping a second job, receiving benefits in kind (a company car or private medical), claiming Marriage Allowance, taxable state benefits being added to your forecast, or HMRC reconciling an underpayment from a previous year by reducing your current allowance. You should always check the calculation on the HMRC personal tax account.
What is an emergency tax code?
An emergency tax code (1257L W1, 1257L M1, or 1257L X) is applied when an employer does not have a full record of your pay history yet, typically when you start a new job without a P45. It taxes each pay period in isolation rather than cumulatively across the year, often resulting in overpaid tax. Submitting a P45 or filling in HMRC's New Starter Checklist usually moves you to the correct cumulative code within one or two pay periods.
Can I get a PAYE tax refund and how?
Yes. If you have overpaid through PAYE (because of an emergency code, mid-year job change, work-from-home expense relief, professional fees, or a P11D not yet reconciled), HMRC reconciles automatically after the tax-year-end P800 reconciliation and either adjusts the next year's tax code or sends a refund. You can also claim mid-year via the HMRC personal tax account, especially for work expenses, uniform allowances, or charitable donations.
Sources and further reading
- HMRC (2026) Income Tax rates and Personal Allowances, gov.uk - the official 2026/27 bands.
- HMRC (2026) Tax codes, gov.uk - what every code means.
- HMRC (2013) PAYE Real Time Information, gov.uk - the RTI reporting regime.
- Institute for Fiscal Studies (2024) Tax revenue and the threshold freeze - the impact of fiscal drag on PAYE receipts.
- MoneySavingExpert (2026) Tax code rebate guide.