What is the PAYE scheme?
Tax is one of the only certainties in life - unless you evade or elope, you always end up paying it. Most employees' tax is deducted directly from their pay at the end of each week or month. This method of collection is called ‘Pay As You Earn', or more commonly ‘PAYE'.
The tax you pay is your contribution to central government spending on all the benefits we enjoy as part of a developed economy. These include things like transport, health and education and the more you earn, the more you pay.
Tax codes and allowances
It is the job of a government department called HM Revenue & Customs (HMRC) to allocate your tax code. It's shown clearly on your payslip, representing the amount of money you can earn each year before paying tax and informing your employer how much to deduct from your wages.
For example, your tax code might be something like L525. If you multiply the three digits by ten, you'll get the amount you are allowed to earn before paying tax (in this case, £5,250). The amount you can earn tax free is called your ‘tax allowance' the value of which changes every so often, depending on government tax policies and other factors like your age and marital status. For most people, it's generally around £5,000 a year.
Anything you earn above this rate is taxable at various rates. Roughly the next £2,000 earn will be taxed at 10%, then the next £32,000 at 22% and anything above that at 40%.
The National Insurance (NI) contributions you pay go towards your state pension and other social security benefits. Like income tax, it is related to how much you earn and is deducted from your wages through the PAYE system. The current rate is set at 9% for most employees.
Your employer is obliged by law to deduct tax and NI from your pay at source. You are never legally allowed to accept ‘cash in hand' payment for your work. To check the exact numbers that will be taken from your wage slip, use one of the many free online tax calculators available.
Paying over or under
Remember: if you pay too little tax, you'll eventually end up having to repay it sooner or later so make sure you don't go off on a spending spree with the unexpected extra money. It's important to make sure you have the right tax code so ask your HR department for clarification if you're unsure.
It's not unusual to overpay tax, especially at the start of your employment or if you regularly undertake part-time work. Here are some common reasons for over-paying:
- You were given an ‘emergency' tax code when you started work
- Your employer was or is using the wrong tax code
- You only worked for part of a year
- You held more than one job at the same time
- You retired, got made redundant or became self-employed
Getting your money back is much harder than paying it in the first place. HMRC are notoriously slow to refund overpaid taxes, but they will get round to it eventually, even though they may need a nudge. You have to write to your tax office explaining why you think you paid too much tax, enclosing evidence like payslips or the P45 form you received when you left a job. You can make claims for overpayment of tax for up to six years before the date of your claim.
Tax on other benefits
As well as any cash bonuses you receive from your employer, Benefits In Kind (BIKs) that are taxable include:
- Company cars
- Low interest loans
- Subsidised living accommodation
- Medical insurance
Thankfully, there are some benefits you can enjoy that don't come with a tax bill attached. These include things like:
- Subsidised meals, drinks and snacks
- Mobile phones
- Parking provision
- Christmas parties and other events
- Childcare provision
Finding out more
Tax is a highly complex business, and we can't possibly cover everything here. If you want to know more about tax liabilities for your current situation, ask your employer's HR or accounts department or visit direct.gov.uk.