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PAYE stands for Pay As You Earn and it is the system by which tax is deducted from employees or pensioners throughout the current tax year. Employees and pensioners are assigned a PAYE code which indicates the value of tax that should be deducted.

The process of PAYE involves 3 parties: The HMRC, your pension provider or employer and you.

PAYE is the most commonly used system for tax deductions. How often tax will be deducted depends on the frequency of your pay. Most employees and pensioners will have tax deducted either weekly or monthly. There are cases where pensioners are paid either quarterly or annually, in which case they will be taxed according to when they are paid.

How PAYE works

The process is initiated by the regulatory body for tax, the HMRC. The HMRC will:

  • Calculate a tax code for you
  • Issue you with a P2 form which will notify you of your tax code. This form will also show how they have calculated your tax code. If the HMRC are not under obligation to issue you with a coding notice, you may still request one.
  • Communicate with your employer to make them aware of what your tax code is. That being said, they will not show the HMRC how your tax code has been calculated.

Your employer or pension provider will then use your tax code to calculate how much money should be deducted from your pay or pension for tax. They will pay this money, and any national insurance contributions, if required, to the HMRC.

Employers and pension providers have systems and procedures in place which allows them to use a given tax code when paying you. It is, therefore, of the utmost importance to confirm that your employer or pension provider has informed the HMRC of your correct income.

If you begin receiving new income, you can expect to see an updated coding notice from the HMRC to notify you of any changes to your tax code. It is important to make sure that tax codes issued by the HMRC are being operated by your employer. Confusion can arise for pensioners in the event that they have multiple sources of income from more than one pension. It is important to make sure that the tax codes that you have been issued with are actually taking the correct amount of tax.

Payslips

If you are under employment you will be issued with a payslip every time you are paid. The payslip may include the tax code by which your employer used to calculate to calculate how much tax to deduct from your gross pay. If you are the recipient of a pension, generally, you will not receive a payslip every time you receive a payment. In the event that your tax code should change - full notification from the HMRC should be given.

Tax Year End

If you are employed or receiving a pension, an ‘end of year certificate’ (p60 or equivalent) should be issued by 31st of May. The date when a tax year comes to an end is 5th April. The P60 will detail your pay or pension and how much tax has been deducted throughout the course of the year, as well as the final tax code operated. Your employer or pension provider will supply the same information to the HMRC.

How can EDA Professional Services help

To find how EDA Professional Services can help with PAYE and any queries you may have, please do not hesitate to get in touch.