How PAYE works
When you're employed in the UK, you don't file a tax return for your wages — your employer does it for you, in real time, every payday. They run your gross pay through HMRC's published tax rules, deduct the right amount of Income Tax and National Insurance, and pay you the rest. The amount they deduct is reported to HMRC under the Real Time Information (RTI) system the same day.
The calculation uses three inputs:
- Your gross pay for that period
- Your tax code, which tells the employer how much tax-free Personal Allowance to apply
- Your National Insurance category letter, which determines NI rates (most employees are on category A)
PAYE is cumulative for Income Tax — meaning your employer looks at your year-to-date earnings and works out the correct tax for the year so far, then deducts whatever's still owed in that pay period. National Insurance is non-cumulative — calculated separately on each pay period in isolation.
A worked example
You earn £50,000 a year and have tax code 1257L. On a monthly payslip:
- Gross monthly pay: £4,167
- Personal Allowance (1/12 of £12,570): £1,047.50 tax-free
- Income Tax: 20% on (£4,167 − £1,047.50) = £623.90
- National Insurance: 8% on the slice between the monthly NI threshold (£1,047.50) and Upper Earnings Limit, or 2% above
Total monthly deductions for Income Tax and NI come to around £874, leaving net pay of about £3,293.
When PAYE doesn't apply
PAYE is for employed earnings. Self-employed people, contractors operating through their own limited company taking dividends, and people with rental or investment income above the various allowances all settle their tax via Self Assessment instead — an annual filing with HMRC by 31 January each year.
If you're employed AND have side income, you usually do both: PAYE handles your salary, Self Assessment handles the rest.
Common PAYE questions
Why does my Income Tax sometimes go down between months? PAYE's cumulative calculation can produce a smaller deduction if you've overpaid earlier in the year — common after a tax code correction or a return from unpaid leave.
Why was my bonus taxed so heavily? Because PAYE catches up on the cumulative position when a bonus pushes your year-to-date earnings well above the steady-state. See our Take-Home Pay Calculator to model your specific situation.