What is PAYE?

PAYE stands for Pay As You Earn and is the UK’s standard method for taxing employees.

Each taxpayer is entitled to a tax free personal allowance calculated in relation to their personal circumstances. This is reflected in the tax code which is one tenth of the personal allowance. Also, the personal allowance is generally cumulative. So, if the tax code is, say 522L, this represents a tax free personal allowance for the year of £5,225, which is cumulative. Thus, in week 1 the tax free amount will be 1/52 of £5,225 and in week 2, 2/52 set off against 2 weeks wages and so on. So, if you miss a week, you still get your full tax free personal allowance.

However, in some circumstances, the tax code is not cumulative and this will be shown by a different suffix letter such as X. BR tax codes mean that basic rate tax is charged on all earning without a tax free element and this is often used where HMRC require further information from the taxpayer.

In short, the tax code is a method used by HMRC to ensure that you pay the correct amount of tax each pay period.

National Insurance, which is the UK’s social security payment, is not cumulative and is assessed and paid each pay period on the income earned in that pay period. There can be exceptions to this but they are not usual.