Understanding Pay As You Earn (PAYE)
Every month your employer gives you a wage slip. And every month a huge chunk of your money gets taken out by the Taxman. TheSite.org explain what all the codes mean.
The Pay As You Earn (PAYE) system is a method of paying income tax whereby your employer deducts tax from your wages (including sick pay and maternity/paternity pay). This means that you pay tax over the whole year, each time you are paid, and your employer is responsible for sending the tax on to HM Revenue and Customs (HMRC).
PAYE codes
You'll find your PAYE code on your payslip. Most are made up of a number relating to your tax free allowances followed by a letter relating to the type of allowances you're getting.
The number is normally your personal tax allowance (the amount you can earn before tax is deducted) divided by ten. For example, for 2009-10 it usually would be 647 (for the income tax allowance £6,475).
For most people under 65 the letter in the tax code will be 'L', which means that you're eligible for the basic personal tax allowance.
If your code is 'BR' with no number it means you have not been given any allowances and tax will be deducted at the basic rate from all income. This code may be given where you have two jobs, and your personal tax allowance is applied to your other job.
Getting a tax code
When you leave a job your employer should give you a P45 which will have all your tax information so that you can present it to your new employer when you start work.
If you've lost your P45, or don't have one because you're starting your first job, your employer will give you a P46 to fill in and sign. Depending on the inofrmation you provide, they may need to allocate an emergency tax code. If this is your first job and you have had no other income in the tax year, you should be put on a normal code giving you the basic personal allowance on a 'cumulative' basis. That means you will get the full allowance for the tax year so far.
But if you have already had another job in the year or this is a second job, you will be given an 'emergency code'. What this will be depends upon your answers on the P46. If you have said you have had a previous job in the tax year, you will probably be given the basic personal allowance code, but on a 'non-cumulative' or 'week one/month one' basis. This means you will only get part of the allowance each week or month, not the full allowance in the tax year so far.
This may deduct more tax than you should be paying. Once HMRC have all the information they need you should be given a permanent tax code. When this tax code is used by your employer any tax you have overpaid will be returned to you.
Emergency tax codes
If your employer isn't given your tax code from a P45 at the start of your employment you will be allocated a code based on your P46. If so, the tax code on your payslip will have suffix or prefix of either BR, X, WK1 or MTH1, and will also include the letter L.
Emergency tax means that you get only the basic personal allowance. However, unless you are entitled to any other allowances or tax reliefs, you should not be paying any more than when your tax code comes through.
You will stop being taxed on an emergency code either when the tax office sends your employer (and you) a PAYE tax code and details of previous earnings and tax paid for that tax year, or at the end of the tax year. If so, the tax code on your payslip will have suffix or prefix of either X, WK1 or MTH1, and will also include the letter L.
If you said on the P46 that this is a second job, you will get an emergency code of 'BR'. This means that everything you earn will have tax taken off it at the basic rate (currently 20%).
As long as you answer the questions on the P46 correctly, your tax shouldn't go too far wrong, but the tax office will issue the correct code after they've received the P46 from your employer. Look out for it and make sure you check it when it comes through.
Reclaiming tax
If, at the end of the tax year, you think you have paid too much tax, you should claim a rebate by contacting your tax office.
Self Assessment
Under the system of Self Assessment you have to assess how much tax you have to pay on any income which you receive which is not taxed through PAYE - for example, income from renting out a room or from freelance work.
You must tell HM Revenue and Customs (HMRC) if you receive taxable income in addition to that which you pay through PAYE. You will then have to complete a tax return form.
Change in circumstances
If your circumstances change during the tax year - for example, if you become entitled to a new allowance or relief - you should inform HMRC as soon as possible.
By Tom Green
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