In the simplest terms, PAYE or pay as you earn is income tax that’s deducted from your salary before it reaches your bank account. National insurance contributions are also taken from your wages, which include sick pay, maternity or paternity pay, and adoption pay. This tax isn’t paid in an annual lump sum – it’s taken every time you get your pay.
How is PAYE calculated? Find out more information here…
PAYE Calculations
PAYE is worked out on the basis of how much you earn and whether you’re entitled to the personal allowance – the amount you can earn tax-free each year. This figure is currently £12,500 for 2020-2021.
Over the personal allowance tax will be charged at 20%, 40%, or 45% determined by your income. See below for PAYE tax rates and thresholds:
- Personal allowance £0- £12,500
- Basic rate (20%) £12,501-£50,000
- Higher rate (40%) £50,001-£150,000
- Additional rate (45%) £150,001+
National Insurance is deducted from every salary if your earnings are over a certain amount. The 2020-2021 threshold is £9,500. You can quickly work out your National Insurance and Income tax by using the navigation aids on recommended websites.
Tax codes and PAYE
HMRC uses a tax code made up of a number followed by a letter. The number shows the amount of income you have that may be set against the tax – and the letter indicates the type of allowance you’re getting. You can find your tax code on your payslip, your pension statement, or a notice of coding sent to you by your tax office.
If the tax office can’t give you a code immediately – if you’re newly employed for example – you’ll be given an emergency tax code which assumes you’re entitled to the basic tax allowance and doesn’t initially take into account any reliefs you may be eligible for.
At the end of each tax year, you’ll receive a P60 – a form showing the gross total amount of money you’ve been paid, tax deductions, and how much net income is received.
PAYE and Pensions
PAYE is also used to collect tax from pension incomes. This will be collected by your pension provider and forwarded to HMRC. How often this tax is deducted is related to how often you’re paid.
Self Assessment
If you’re self-employed you may need to complete a tax return to provide HMRC with your correct financial details. This is known as self-assessment and includes income from self-employment and any other untaxed income.
If you need any help with the self-assessment system get in touch with trusted tax accountants in London who will factor in all income, and take care of your NIC contributions for you. Readily available VAT return services provided by experts will ensure any correspondence with HMRC will be dealt with in a timely manner.
Debt and PAYE
HMRC can reclaim money that you owe them through the PAYE system, but this is limited. If earnings are less than £30,000 annually, they can collect up to £3000 in that year. This may increase if earnings do – but the maximum they’re able to take would be 50% of your pay.
If you have any debt management problems you can get help and support from your local Citizens Advice Bureau.