TL;DR
PAYE is the system HMRC uses to collect income tax and NI from employed earnings at source. Employers calculate and deduct each pay period using tax codes, then remit to HMRC monthly. This guide covers RTI, tax codes, and end-of-year reconciliation.
Key facts
- PAYE introduced 1944, collects roughly two-thirds of UK income tax revenue.
- Employers operate PAYE under the Income Tax (PAYE) Regulations 2003.
- Real Time Information (RTI) requires submissions on or before each pay date since April 2013.
- Tax codes set the allowance and rate applied: 1257L is the standard for 2026/27.
- Employers remit monthly by 22nd (electronic) or 19th (post).
- Year-end reconciliation produces P60 by 31 May for each employee.
- P11D for benefits in kind due by 6 July following the tax year.
- Employer reference: format three-digit + 'PA' + reference, found on payslip.
Pay As You Earn (PAYE) is the mechanism HMRC uses to collect income tax and National Insurance from employed earnings at source. Introduced in 1944, PAYE now collects around two-thirds of UK income tax revenue. Employers operate the system as collecting agents, calculating deductions each pay period and remitting to HMRC monthly.
This guide covers how PAYE works from the employee's side, the Real Time Information regime, tax codes, the end-of-year forms, and the points at which employees most commonly need to query their position through the Personal Tax Account or directly with the employer.
How PAYE works in a pay period
Each pay period the employer takes gross pay, applies any salary sacrifice reductions, calculates income tax against the tax code using HMRC's tax tables or PAYE software, calculates NI against the thresholds, applies student loan and postgraduate loan deductions where relevant, and produces the net pay figure. The cumulative method means each pay period is calculated against year-to-date totals.
HMRC publishes detailed PAYE Regulations under SI 2003/2682. The Income Tax (PAYE) Regulations 2003 cover the operation of codes, the timing of remittances, the forms required, and the penalties for non-compliance. The regulations have been amended frequently to accommodate RTI, auto-enrolment, and other changes.
Worked example: a monthly-paid employee on 1257L receives GBP 3,000 gross in November (month 8). Year-to-date pay GBP 24,000, year-to-date allowance GBP 8,380 (8/12 of GBP 12,570), year-to-date taxable pay GBP 15,620, year-to-date tax due GBP 3,124 at 20%. Less tax already deducted in months 1 to 7 of GBP 2,734 (7/8 of year-to-date), month 8 tax GBP 390. NI month 8: GBP 3,000 less GBP 1,048 = GBP 1,952 at 8% = GBP 156. Net pay GBP 2,454.
Employers send Real Time Information to HMRC on or before each pay date using a Full Payment Submission (FPS). HMRC uses the FPS data to update the employee's tax record, identify coding issues, and feed the State Pension and Universal Credit systems.
Tax codes: structure and meaning
A tax code combines numbers and letters. The numbers represent the Personal Allowance the employer should give, divided by 10. 1257 means GBP 12,570 of allowance. The letters indicate the category: L for standard, M for Marriage Allowance receiver, N for Marriage Allowance transferor, T for items that need review at year-end, K for adjustments that reduce allowance below zero (typically for taxable benefits exceeding the allowance), 0T for no allowance with full bands, BR for basic rate only, D0 for higher rate, D1 for additional rate, NT for no tax (used for some non-resident or specific cases).
Prefix letters identify regional taxpayer status: S for Scotland (S1257L), C for Wales (C1257L). No prefix means England or Northern Ireland. The prefix is set by HMRC based on the address held; a recent move that has not been notified to HMRC may leave the code uncorrected.
Suffix indicators include W1 (week one) or M1 (month one), which signal an emergency non-cumulative code. The employer applies the allowance only to that period's pay, ignoring year-to-date totals. Emergency codes typically over-tax in early periods and are replaced by HMRC with a cumulative code once full information is available.
Worked example: an employee receives a coding notice showing 1257L K200. The 1257L portion gives standard allowance; the K200 adjustment for a taxable benefit (perhaps a company car) reduces the allowance by GBP 2,000. Net code allowance is GBP 10,570; PAYE applies that against the pay each period.
Real Time Information and what HMRC sees
RTI replaced the older year-end reporting model in April 2013. Every payroll run sends a Full Payment Submission (FPS) to HMRC with the gross pay, tax, NI, student loan and other deductions for each employee. An Employer Payment Summary (EPS) covers additional information including statutory recovery (SMP, SSP), Employment Allowance claim, and Apprenticeship Levy.
HMRC uses RTI data to maintain the employee's tax record in real time, to detect underpayments and overpayments early, and to feed Universal Credit and State Pension systems. The PTA shows year-to-date PAYE income for each employer or pension, drawn from RTI submissions usually within a few days of the pay date.
Discrepancies between an employee's payslip totals and the PTA figures usually reflect RTI submission delays (most common in early months) or differences between gross pay and taxable pay (for example post-sacrifice salary versus headline salary). Persistent differences beyond two months warrant a query through the PTA's tax code section.
Edge case: where an employer fails to make RTI submissions, HMRC charges late filing penalties under Schedule 24 Finance Act 2007. The employee's tax record may be incomplete, leading to year-end discrepancies. The employee remains responsible for the correct tax position, but HMRC will normally cooperate to fix records where the employer is the source of the error.
Year-end: P60, P11D and reconciliation
By 31 May following each tax year the employer must provide each employee in continuous employment at 5 April with a P60 (End of Year Certificate) showing total pay and deductions for the tax year. The P60 is the primary record for mortgage applications, benefit claims, immigration applications, and Self-Assessment cross-checks. Employers may issue digital P60s in PDF form provided they meet HMRC standards.
By 6 July the employer must submit P11D forms to HMRC reporting taxable benefits in kind for each employee who received them. Common P11Ds include company cars, private medical insurance, low-interest loans above GBP 10,000, and subsidised housing. A copy goes to the employee. HMRC adjusts the next year's tax code to collect the tax on the benefits.
Where an employee leaves part-way through a tax year, the employer issues a P45 showing year-to-date pay and tax. The P45 transfers to the next employer (or to HMRC via the employee) to ensure the cumulative method continues correctly. A new employer without a P45 typically starts the employee on an emergency code until HMRC issues a corrected cumulative code.
Year-end reconciliation: HMRC processes RTI, P11D and tax-return data to produce a P800 calculation (where one is needed) showing any over or underpayment. Refunds are paid through the PAYE system or by direct request through the PTA. Underpayments are normally coded out through the following year's tax code, with payment plans for larger amounts.
Employer reference, tax office and queries
Every employer has a PAYE reference issued by HMRC, in the format three-digit office number, slash, employer's alphanumeric reference (e.g. 123/AB45678). The reference appears on payslips, P45, P60, P11D and any HMRC correspondence about the employment. Quoting it speeds any HMRC query.
The Accounts Office reference is a separate number used for PAYE payments to HMRC, in the format three-digit + 'PA' + reference. Employers pay PAYE deductions monthly by the 22nd of the following month (electronic) or 19th (post). Late payment incurs interest and potential penalties under Schedule 56 Finance Act 2009.
Where an employee has a PAYE query, the right starting point is the Personal Tax Account, which shows the current tax code and year-to-date income. The PTA's 'check your tax code' section explains the breakdown and provides routes to query or adjust. The HMRC income tax helpline (0300 200 3300) handles queries that the PTA cannot resolve, with the longest wait times in January.
Edge case: an employee with two simultaneous jobs has their Personal Allowance allocated to the main job (1257L) and the second job typically on BR (basic rate). Where the split is suboptimal, the PTA allows the employee to ask HMRC to reallocate the allowance between codes. The reallocation takes effect from the next coding notice issued to each employer.
Disclaimer
This article provides general information based on rules and figures published by UK government and regulator sources as of May 2026. It is not personal financial, legal, immigration or tax advice. Rules, fees and figures change and individual circumstances vary. Readers should check primary sources or consult a qualified, regulated adviser before acting on any information here.
Frequently asked questions
What does PAYE actually do?
Pay As You Earn collects income tax and National Insurance from employees at source. Each pay period the employer calculates the deductions using HMRC tax tables or payroll software, deducts them from gross pay, and remits to HMRC by the 22nd of the following month (electronic). PAYE has covered most UK employees since 1944 and now collects around two-thirds of UK income tax revenue. The mechanism is governed by the Income Tax (PAYE) Regulations 2003.
What is a Real Time Information submission?
An RTI submission is a payroll report sent to HMRC on or before each pay date, replacing the older year-end-only reporting model since April 2013. The Full Payment Submission (FPS) reports each employee's pay and deductions; the Employer Payment Summary (EPS) reports adjustments and claims. HMRC uses RTI to maintain real-time tax records, detect coding errors, and feed Universal Credit and State Pension systems. The PTA reflects RTI data usually within a few days of the pay date.
What's the difference between P45, P60 and P11D?
P45 is issued when an employee leaves, showing year-to-date pay and tax for the partial year. P60 is issued annually by 31 May for each employee still employed at 5 April, showing total pay and deductions for the full tax year. P11D is issued annually by 6 July for any employee who received taxable benefits in kind, reporting those benefits to HMRC and the employee. Each form has its specific role in PAYE reconciliation and the employee's tax record.
Why do tax codes change mid-year?
HMRC adjusts tax codes whenever new information arrives: new employer (P46 / starter checklist), new benefit in kind (P11D), Marriage Allowance application, taxpayer reporting a different income estimate, automatic adjustment for accrued underpayments, or change in regional taxpayer status (England, Scotland, Wales). Each adjustment generates a new coding notice. The PTA shows the breakdown of how the current code was built and the route to query or correct it.
Can I check my PAYE position online?
Yes through the Personal Tax Account at gov.uk/personal-tax-account. The PTA shows the current tax code with breakdown, year-to-date PAYE income from each employer or pension (drawn from RTI), recent coding notices, and the cumulative tax position. PTA also allows the employee to query a tax code, claim refunds, apply for Marriage Allowance and update personal details. The HMRC app provides similar features on mobile with biometric login.
