What Is PAYE UK 2026? How Pay As You Earn Tax Works

What Is PAYE and How Does It Work?

PAYE stands for Pay As You Earn. It is the system through which HM Revenue and Customs (HMRC) collects income tax and National Insurance contributions from employees. Under PAYE, the employer deducts tax and NI from the employee gross pay before paying the net amount. The employer then pays the deducted amounts to HMRC, typically monthly. The employer pays on the 19th of the following month by cheque or the 22nd electronically.

PAYE applies to all employees earning above the lower earnings limit, which is 129 pounds per week (559 pounds per month) in 2026/27. It also applies to occupational pension payments. The system means that most employees in the UK pay the correct amount of income tax throughout the year without needing to complete a self-assessment tax return, as tax is spread evenly across all pay periods.

Tax Codes: What They Mean

HMRC assigns every employee a tax code that tells the employer how much of the employee income is tax-free. The standard code for 2026/27 is 1257L, where the number is the personal allowance divided by 10 (12,570 divided by 10 = 1,257). The letter indicates the type of allowance.

Common codes: L means standard personal allowance. M means the employee received a Marriage Allowance transfer (10% of partner allowance). N means the employee transferred 10% of their allowance to a partner. BR means all income from this employment is taxed at 20% basic rate, typically for second jobs. D0 means all income is taxed at 40%, typically for a second employment. K codes (e.g. K497) indicate a negative allowance where additional tax is being collected, for example for a benefit in kind. W1 or M1 at the end of a code means an emergency code: tax is calculated period by period rather than cumulatively.

Income Tax Rates Under PAYE in 2026/27

Income tax is calculated cumulatively throughout the tax year running 6 April to 5 April. For a monthly-paid employee, each month they receive 1/12th of the annual personal allowance (1,047.50 pounds) and 1/12th of each tax band. The 2026/27 income tax rates are: 20% on earnings from 12,571 to 50,270 pounds (basic rate); 40% on earnings from 50,271 to 125,140 pounds (higher rate); 45% on earnings above 125,140 pounds (additional rate). Scotland has separate income tax rates which differ from the rest of the UK.

The cumulative calculation means that if an employee earns less in early months then receives a bonus, the payroll recalculates their expected annual income and adjusts deductions accordingly. An employee who earns little early in the year then receives a large payment may have previously overpaid tax refunded automatically.

National Insurance Under PAYE

Unlike income tax, NI is calculated non-cumulatively: each pay period is assessed independently. This means a bonus in a single month pushes the employee into a higher NI bracket for that month even if average monthly pay is below the upper earnings limit. Employee NI in 2026/27: 8% on earnings between the primary threshold (242 pounds per week) and the upper earnings limit (967 pounds per week); 2% on earnings above the upper earnings limit. Employees earning below the lower earnings limit (129 pounds per week) pay no NI but are treated as having paid it, protecting state pension entitlement.

Employers pay NI on top of employee wages. In 2026/27, employer NI is 15% on each employee earnings above 417 pounds per month (the secondary threshold). Eligible employers can claim the Employment Allowance of up to 10,500 pounds per tax year to offset their employer NI liability.

Your Payslip

Every payslip must show: gross pay before deductions; income tax deducted; employee NI deducted (both shown separately); any pension contribution; net pay. The payslip must also show the tax code applied and cumulative tax paid year to date. If your year-to-date income tax appears too high or too low, check your tax code. Common causes of wrong codes include a previous employer not updating HMRC, benefits in kind being collected through the code, or a previous underpayment being recovered. Contact HMRC via the personal tax account at gov.uk if the code appears incorrect.

Real Time Information (RTI)

Under RTI, employers must submit a Full Payment Submission (FPS) to HMRC on or before each payday. The FPS includes each employee pay, deductions, and year-to-date figures. HMRC uses this to monitor whether the correct tax is being collected in real time. Late or missing FPS submissions attract automatic penalties starting at 100 pounds per month for employers with 1 to 9 employees. Employers who expect to make no payment in a tax month must submit an Employer Payment Summary (EPS) to inform HMRC and avoid a nil-pay penalty.

Frequently Asked Questions

What does PAYE stand for?

Pay As You Earn. It is the HMRC system through which employers deduct income tax and National Insurance from employee wages before paying net salary.

What is the standard PAYE tax code in 2026/27?

1257L, reflecting the 12,570 pound personal allowance. If your code differs, HMRC has made an adjustment, for example for a benefit in kind or Marriage Allowance transfer.

How do I check my tax code?

Check your payslip or your HMRC personal tax account at gov.uk/personal-tax-account. If it appears wrong, contact HMRC to request a review before you overpay or underpay tax for the whole year.

Do I need a tax return if I am on PAYE?

Most PAYE employees do not. You may need one if you have additional income above 1,000 pounds from self-employment, rental income, capital gains above the annual exempt amount, savings interest above the Personal Savings Allowance, or income above 100,000 pounds.

What if I have two jobs?

Your personal allowance is normally allocated to your first job (code 1257L). Your second job is taxed at basic rate on all earnings (code BR) or higher rate (D0). If total income from both jobs is below your personal allowance, apply to HMRC to split the allowance between employers.