Once we earn over a certain amount, we all have to pay income tax and National Insurance (NI).
For most of us, it’s taken directly from our payslips at the end of every week or month, all via something known as the Pay As You Earn system – or PAYE. Not up-to-speed on all your tax-related terminology?
We asked the Money Advice Service to explain how it works…
What is PAYE?
The Pay As You Earn system, often shortened to PAYE, is basically the process put in place that allows us to pay our income tax and National Insurance.
Your employer automatically calculates how much you need to pay, and takes it out of your pay packet before you get it. They then send it through to HM Revenue & Customs (HMRC) and pay you the remaining amount from your salary.
How much do I pay?
Essentially, the amount of tax you pay is entirely dependent on your salary.
For the 2018-19 tax year, the standard amount you can earn without paying tax is £11,850. Over that amount, you’ll pay 20 per cent of your money to the HMRC, and any money earned over £46,351 will be subject to 40 per cent income tax.
Your tax code will tell you how much you can earn before having to pay tax.
For more information about which code applies to you, read our article on tax codes explained.
Will my tax code change?
Your code gets calculated for the year ahead so if you have periods where you don’t work you might be able to claim some money back at the end of the tax year.
At the same time if you earn more money you may have to pay more. With this in mind, you should always check that you are on the correct tax code each time you get paid. To find out, all the relevant information should be available on your payslip.
What happens when I start a new job?
If you’re starting a new job, you will be required to hand in your P45 form (given to you by your previous employer) or fill in a P46 form. This will help HMRC calculate your correct tax code.
Bonuses are also paid via PAYE, which means they will usually have tax and NI deducted from them.
What happens if I’m self-employed?
If you earn any amount on top of your wages, your tax and National Insurance contributions will need to be paid through self-assessment.
To do this you will need to keep track of all your earning and outgoings, and then complete a tax return form. For more information on how to do this, we recommend contacting HMRC directly.
Still not sure about what PAYE means for you? Find out more about tax and NI deductions with the Money Advice Service.