Understanding Pay As You Earn (PAYE)
Every month your employer gives you a payslip. And every month a huge chunk of your money gets taken out by the Taxman. The Mix explains what Pay As You Earn (PAYE) tax codes mean.
What is PAYE?
PAYE is basically the money that gets taken away from your wages for tax. The Pay As You Earn (PAYE) system is how you pay both your income tax and national insurance (NI). Every time you’re paid, your boss takes your tax and NI from your wages and sends it on to HMRC. There may be other costs knocked off your wages too, like re-payments of your student loan or pension contributions. You can see all of this on your payslip every month.
How much tax should I be paying?
Until you earn over a certain amount, you don’t pay any income tax. This is called your personal allowance. For the tax year 2015-2016 it is £10,600.
Once you’ve earned over that, the rest of your wages will be taxed at 20%. This percentage goes up if you earn loads of money.
On top of this, at least 12% of your wages will go to national insurance if you earn more than £146 a week.
Am I on the wrong tax code?
HMRC gives your employer your tax code so they know how much tax to take from your wages.
Most people are on tax code 810L, which simply means (as above) you don’t pay tax on £8,104 of your wages a year, and pay 20% on the rest. If you’re on a different tax code you can check what it means on the gov.uk website.
If you think you’re on the wrong code, call HMRC.
When you start a new job you’ll often get an ’emergency tax code’. Your employer will use this if HMRC hasn’t given them your tax code yet. Normally, you’ll pay pretty much the same tax as if they had your permanent tax code, but if you pay too much, you’ll get the money back in your next wage packet.
Your tax codes are a bit more complicated if you have two jobs.
I think I’ve paid too much, can I claim tax back?
I’m self-employed, how do I pay tax?
If you’re self-employed, or earn anything on top of your wages, you pay your tax through self-assessment. To do this, you’ll have to keep track of all your earnings and complete a tax return form.
Change in circumstance
If your circumstances change during the tax year – for example, if you get married and can get a Married Couples Allowance – you should inform HMRC as soon as possible.
Updated on 29-Sep-2015
Photo of confused boy by Shutterstock
No featured article