PAYE is the system employers use to deduct Income Tax and National Insurance from wages before paying employees. This guide explains how it works and what a tax code does.
Published July 2026 · Updated July 2026
Pay As You Earn is how employers collect Income Tax and National Insurance from employees. Each payday the employer works out the deductions, pays the employee the net amount, and sends the tax and NICs to HMRC.
HMRC gives each employee a tax code (for example 1257L) that tells the employer how much tax-free pay to give before deducting tax. A wrong code can mean paying too much or too little, so it is worth checking.
Often not, PAYE usually collects the right tax. You may still need Self Assessment if you have other untaxed income.
You could over- or under-pay tax. Contact HMRC to correct it; over-payments are usually refunded.
Source: GOV.UK ↗. This glossary is written for small business owners, so definitions are simplified. Tax rates and thresholds reflect 2026/27 UK rules and change over time. Berified does not provide accounting, tax or legal advice; always check the source or a qualified adviser.