How You Pay Tax – if You Work for an Employer

 

For most employees, Income Tax & National Insurance will be deducted automatically from their pay, via the PAYE (Pay As You Earn) scheme

 
Purple Piggy with coin coming out
 
In this section, we explain how tax is collected via an employer’s PAYE scheme, how to check if you’ve paid the right amount and what to do if not. Plus we demystify tax jargon.
 

 
If you work for an employer, Income tax, National Insurance and any pension contributions or student loan repayments you owe will normally be deducted automatically before you even receive your pay, through the PAYE (Pay As You Earn) scheme. Therefore, most employees will not be required to complete a tax return.
 
However, there are some situations where you may also need to file a Self Assessment tax return: if you are employed with a salary taxed through PAYE, but you earn additional income from other sources, you must notify HMRC and you may be required to pay tax through the Self-Assessment scheme e.g. if you earn extra money from freelancing or renting out a room, income from abroad, or savings interest over the the Personal Savings Allowance.
 
If you are self-employed, please see How You Pay Tax – Self Assessment.
 
 
 

When You Start a New Job

 

  • Or hand in your P45 form (if you have worked previously)

 
 
 

Your Tax Code

 
From this information HMRC sets a PAYE tax code, which tells your employer how much tax to deduct from your pay. Your tax code reflects any allowances and reliefs you’re entitled to, and will be adjusted to take account of any tax owing on savings and investments. E.g. the tax code 1250L indicates you have the standard Personal Allowance of £12,500 tax-free income for the year.
 
If you have just started a new job, you could be allocated an emergency tax code (often 1250), before it has been worked out correctly.  If that’s the case, HMRC will automatically update it, but it means your pay could vary for the first few months.  If you have had temporary jobs and earned less than £12,500 over the tax year, you may have overpaid tax and be due a refund.
 
 

Check your tax code

It’s important to check you are on the right tax code; if it’s wrong, you could be paying too much or too little tax so you would need to inform HMRC.
 
Find your tax code on your payslip, P45, P60, or the PAYE Coding Notice sent by HMRC.
You may receive a PAYE Coding Notice in March, or if your tax code is updated.  It sets out how much tax your employer will deduct from your salary in the coming tax year, and shows the allowances and reliefs that were used to work out your tax code.
 
Make sure that HMRC have the correct information about you, and notify them about any changes to your circumstances that might affect your tax code e.g. your marital status, a jobs move, a new pension provider or sources of income, working abroad, or taking a career break to have children.
You can do this via the online check your Income Tax service
or call the HMRC helpline 0300 200 3300

 

Tax Code Calculator – Money Saving Expert
Handy tool to check you’re on the right tax code

 

The PAYE System – Citizens Advice
Tax codes explained
Contact an adviser

 

Tax Codes – GOV.UK
How to check if your tax code is correct
Updating your tax code

 
 

If you think your tax code is wrong

Inform HMRC – if they agree, your tax code will be adjusted so you get the appropriate allowance and pay the correct amount of tax over the year.
It’s generally simplest to call the HMRC helpline 0300 200 3300, so you can explain in person why you think your tax code is wrong, and get the matter resolved.
Alternatively, use HMRC online services
 
 
 

PAYE – Pay As You Earn

 
Through the PAYE scheme, your employer deducts Income Tax directly from your monthly earnings, in accordance with your tax code, and sends it to HMRC.
 
The PAYE system is also used to collect National Insurance contributions, student loan repayments and pension contributions (if applicable).  These automatic deductions from your gross pay are all itemised on your payslip – the amount remaining is your net ‘take-home’ pay.

 

Payslip infographic

 
Check and keep your payslips. If there’s anything you don’t understand or think is incorrect, first talk to your employer’s Payroll Department – they should be able to help with problems relating to your tax code or PAYE.

Understand Your Payslip – Money Advice Service

 
 
 

P60 (End of Year Certificate)

 
At the end of each tax year, PAYE taxpayers should receive a P60 statement from their employer – an annual summary of pay and deductions (Income Tax, National Insurance, Student Loan repayments, pension contributions).

If you had more than one job during the year, you get a separate P60 for each job.

Keep your P60 – it provides proof of your tax payments!
It is also proof of your income, which you may need if you apply for a loan or mortgage.
 
 
 

Have You Paid the Right Amount of Tax?

 
This section explains how to check and what to do if you have overpaid or underpaid tax.
In particular, you should check your tax liability if you have any income not taxed through PAYE, if you have worked abroad, or if you have irregular or variable income.
 
Use the HMRC Tax Checkers to estimate how much you should have paid for the current tax year or previous years.
 
Contact HMRC if your P60 shows you have paid too much or too little tax, or if you have any other queries.

If you are unable to pay your tax bill on time, call the HMRC helpline – you may avoid penalties:

Business Payment Support Service: 0300 200 3835
(This helpline is for individuals and businesses)

 
 

If you have overpaid tax

You will get a tax refund.
You can claim back overpayments at the end of the tax year, and for up to 4 years after.
Note that National Insurance contributions cannot be reclaimed.

Claim a Tax Refund – GOV.UK

 

Important: If HMRC agrees you have overpaid tax, they will only ever notify you about a refund by post. So don’t be fooled by email, text or telephone scams telling you that you’re entitled to a tax rebate and asking for personal or payment details!
Don’t give out any private information, or click on links or download attachments.

Dealing with HMRC scams – GOV.UK
How to identify and report HMRC phishing & scams

 
 

If you have underpaid tax

You will have to pay the extra, but this can usually be spread over a period of time so it’s affordable. You must inform HMRC if you think you have paid too little tax (e.g. if you have any additional untaxed income), otherwise you could incur penalties and interest on tax owed, once they become aware of the underpayment.
 
 

Do you have any income not taxed through PAYE?

If your salary is taxed through PAYE, but you have additional untaxed income, you will need to tell HMRC:

  • Savings income over your Personal Savings Allowance for the year 
    Any tax owing on savings interest is normally paid through an adjustment to your PAYE tax code, so you pay the correct amount of tax over the year.

  • Other untaxed income
    Some people on PAYE will also need to file a Self-Assessment tax return if they have other untaxed income (e.g. from freelancing or renting out a room).

Check whether you need to complete a Self-Assessment Tax Return – GOV.UK

Call HMRC: 0300 200 3300

 
 

Variable income? Are you overpaying tax?

Under PAYE, tax is collected monthly, but the amount is based on your annual income. So if for instance, you’re doing short-term jobs until you find permanent employment or go travelling, your monthly income may be variable, meaning you could be overpaying tax and might be due a refund. When you start a new job, you may be assigned an emergency tax code (often 1250), but that means if you earned less than £12,500 during the tax year, you will probably have paid too much tax.

Your P60 (End of Year Tax Certificate) for each job, shows how much tax you have paid.
Estimate what you should have paid, using the HMRC Tax Checker.
Contact HMRC if you think you have paid the wrong amount, or if you have any tax queries.
 
 

Working abroad

If you are classed as a UK resident, you usually still pay UK tax on anything you earn over your Personal Allowance 
If you work for a UK employer, you also pay National Insurance contributions.
 
Check tax arrangements in the country you are working in – they may have a double taxation agreement with UK, which means you could avoid paying tax in both countries.
 
 
 

How You Pay Tax - Self Assessment right arrow