PAYE means 'Pay As You Earn', and is a method of making tax contributions on your earnings to HMRC. With PAYE, your contributions are deducted automatically by your employer on each pay date, and passed over to the government's tax office.
Contributions are taken from your wages along with any maternity, annual leave, sick pay, bonuses, and any other form of payment related to your employment. The rate at which you pay tax will be dependent on your salary. Everyone is allowed a basic tax-free earning of £10,000, after which a percentage of your wage is deducted depending on the threshold of your tax bracket. The breakdown of allowances and deduction percentages are as follows:
|PAYE tax rates, thresholds and codes||2014 to 2015|
|Employee personal allowance||£192 per week
£833 per month
£10,000 per year
|Basic tax rate||20% on annual earnings above the PAYE tax threshold and up to £31,865|
|Higher tax rate||40% on annual earnings from £31,866 to £150,000|
|Additional tax rate||45% on annual earnings above £150,000|
The financial year runs from 1st April - 31st March. At the end of each year you will receive a 'P60' form, which details the total earnings for that year, along with the relevant deductions for tax and national insurance.
If you have multiple incomes, the PAYE system can be used to make contributions in one instalment. For example, if you have an occupational pension, deductions for your state retirement pension are collected from PAYE contributions on your occupational pension. It can also be used to make contributions on otherwise untaxed sources of incoming, such as property letting. As well as providing a platform for you to automatically claim credit for overpaid tax, and making payments in instalments for underpaid tax.
Tax Credits & Debts
With PAYE, if you've earn a particularly large amount during one month (perhaps due to overtime etc), you may end up paying too much tax that particular month, due to tax being applied on a 'pay-as-you-earn' basis. If your earnings return to a normal amount over the next month or two, you should see the tax reduced accordingly (and will likely be less that you'd pay in a normal month) to credit back the overpaid tax for the bumper month. If the tax year has passed and you've overpaid in tax, you should receive a refund from the tax officer in the form of a P800. If not, or if you want the money sooner, you can submit a manual claim to get the money back.
If you've underpaid tax, or owe an outstanding sum for tax, HMRC can use PAYE to collect the money, but there are limits to how much they can take. If you earn £30,000 or less, they can deduct up to £3,000, per year. If you earn more than this, the amount they can deduct increases incrementally, depending on your taxable income. That being said, the most which can be deducted in any year is £17,000, and this doesn't apply until you hit the £90,000 salary threshold.
Self assessment is a convenient and easy way of informing HMRC of any forms of untaxed income. This might be something like renting out a spare room to a lodger, or money made from self-employment alongside regular employment. The tax officer invites everyone to complete a self assessment, but it may not be necessary if you're already making contributions via PAYE. If this applies to you, you should inform HMRC of the situation who will determine whether any additional deductions will be made from PAYE, or if they require you to fill in a self assessment form.Image: © Marcyano79 | Dreamstime.com