PAYE stands for Pay As You Earn. It's the system your employer uses to collect income tax and National Insurance from your salary before it reaches your bank account. Here's how it actually works.
The Cumulative System
PAYE works on a cumulative basis. This means your employer doesn't just look at this month's pay — they look at your total earnings since 6 April (the start of the tax year) and calculate what your total tax should be so far.
If you've paid too much tax in previous months (perhaps because of a bonus or irregular pay), PAYE will automatically reduce your tax this month to correct it. This is why your take home can vary from month to month even if your salary stays the same.
What Happens Each Pay Day
- Your employer looks at your total gross pay since 6 April
- They calculate how much personal allowance you've used so far
- They work out the total tax due on your cumulative taxable pay
- They subtract the tax already collected in previous months
- The remainder is deducted from this month's pay
Why Your Tax Code Matters
Your tax code tells your employer how much tax-free income to give you. The standard code 1257L means £12,570/year (or £1,047.50/month) is tax-free. A wrong tax code means wrong tax deductions — and HMRC won't always catch the error quickly.
When PAYE Goes Wrong
Common issues include starting a new job without a P45 (you'll be put on emergency tax), having benefits like a company car added or removed, receiving a tax code change from HMRC partway through the year, or having multiple jobs where allowances aren't split correctly.
How to Check Your Tax is Right
Use our salary calculator to see what your monthly take home should be. If it doesn't match your payslip, check your tax code first. You can view it on the HMRC app or online account.
Check your expected take home pay
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