Understanding Pay As You Earn (PAYE)
Every month your employer gives you a wage slip. And every month a huge chunk of it gets taken out by the Taxman. TheSite.org explain what all the codes mean.
The Pay As You Earn (PAYE) system is a method of paying income tax whereby your employer deducts tax from your wages (including sick pay and maternity/paternity pay). This means that you pay tax over the whole year, each time you are paid, and your employer is responsible for sending the tax on to HM Revenue and Customs (HMRC).
PAYE codes
You'll find your PAYE code on your payslip. Most are made up of a number relating to your allowances followed by a letter relating to the type of allowances you're getting.
The number is normally your personal tax allowance (income not taxed) divided by ten. For example, for 2008-09 it usually would be 543 (for the income tax allowance £5,435).
For most people under 65 the letter in the tax code will be 'L', which means that you're eligible for the basic personal tax allowance.
If your code is 'BR' with no number it means you have not been given any allowances and tax will be deducted at the basic rate from all income. This code may be given where you have two jobs, and your personal tax allowance is applied to your other job.
Getting a tax code
When you leave a job your employer should give you a P45 which will have all your tax information so that you can present it to your new employer when you start work.
If you've lost your P45, or don't have one because you're starting your first job, your employer will give you a P46 to fill in and sign. They will allocate a temporary tax code and work out the tax due, probably using the emergency tax rate. After a few weeks you should be given a permanent tax code.
Emergency tax codes
If your employer isn't given your tax code at the start of your employment you will get an emergency code. If so, the tax code on your payslip will have suffix or prefix of either BR, X, WK1 or MTH1, and will also include the letter L.
Emergency tax means that you get only the basic personal allowance. However, unless you are entitled to any other allowances or tax reliefs, you should not be paying any more than when your tax code comes through.
You will stop being taxed on an emergency code either 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, or at the end of the tax year.
Reclaiming tax
If, at the end of the tax year, you think you have paid too much tax, you should claim a rebate by contacting your employer's tax office.
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 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.
Change in circumstances
If your circumstances change during the tax year - for example, if you become entitled to a new allowance or relief - you should inform HMRC as soon as possible.
