PAYE stands for “Pay As You Earn” and is a system used by employers in the UK to deduct income tax and National Insurance contributions from their employees’ salaries. The system was introduced in 1944 and is administered by HM Revenue & Customs.
Under the PAYE system, employers calculate and deduct the appropriate amounts from their employees’ wages each pay period. These deductions are then paid to HM Revenue & Customs on the employees’ behalf. At the end of the tax year, employees receive a P60 form from their employer, which shows the total amount of income, tax, and National Insurance contributions for the year.
The amount of tax and National Insurance contributions deducted from an employee’s salary depends on their income and tax code. The tax code is used to determine how much tax-free income an individual is entitled to, based on their personal allowances and any deductions or adjustments that apply.
The PAYE system helps to ensure that employees pay the correct amount of tax and National Insurance contributions throughout the year, rather than having to pay a lump sum at the end of the tax year. It also helps to simplify the tax process for both employers and employees, making it easier to manage and administer.
