What is PAYE tax?
Updated on March 07, 2025
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Table of Contents
Can US citizens in the UK be taxed under PAYE?
Yes, US citizens working in the UK must also pay PAYE taxes. Also known as the Pay As You Earn (PAYE) tax system. This is the equivalent of the US payroll tax withholding system, where taxes are automatically deducted from an employee’s paycheck before they receive it.
How does PAYE work?
The UK government requires employers to integrate the Pay As You Earn (PAYE) system into their payroll, which includes its calculation, reporting to HMRC, making deductions, and managing payroll.
Under the PAYE system, the UK government collects:
- Income Tax (equivalent to US federal income tax withholding)
- National Insurance (NI) (similar to US Social Security & Medicare)
- Other deductions (such as student loan repayments or workplace pensions)
Employers deduct these before employees receive their pay to ensure employees pay taxes throughout the year, reducing the burden of a large tax bill at the end of the year.
HM Revenue & Customs (HMRC) assigns each employee a tax code. This code indicates the amount of tax-free income the employee is entitled to in the tax year and helps employers calculate the amount of tax to deduct.
What are the UK PAYE tax codes?
UK tax codes are typically made up of numbers and a letter. The numbers represent the income you can have before paying tax, and the letter indicates your situation and how it affects your personal allowance.
A new code will also be issued per tax year to update any changes in personal allowance and other circumstances. Here are some of the PAYE tax codes you might see and their meaning:
The most common tax codes for the tax year 2024 to 2025:
|
Tax code |
Meaning |
Who gets it? |
|
1257L |
Standard personal allowance (£12,570 tax-free) |
Most employees with one job |
|
BR |
Basic rate (20% tax on all income, no tax-free allowance) |
Second job or pension income |
|
D0 |
Higher rate (40% tax on all income, no tax-free allowance) |
Second job earning above £50,270 |
|
D1 |
Additional rate (45% tax on all income) |
High earners above £125,140 |
|
0T |
No personal allowance (all income taxed) |
Used when tax allowance is fully used or missing |
|
Kxxx |
Negative tax code (additional tax deducted) |
If you owe tax from benefits (e.g., company car, medical insurance) |
|
NT |
No tax deducted |
Some freelancers or foreign workers in the UK |
Who does not pay PAYE?
Self-employed individuals in the UK are not bound by the PAYE system. Instead, they are responsible for their own tax and National Insurance contributions and typically pay these through self-assessment.
Additionally, UK citizens or residents earning below the personal allowance do not need to pay PAYE. For 2024-2025, the personal allowance for UK taxpayers is £12,570.
Need more help understanding PAYE?
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How is PAYE calculated?
The UK tax system is progressive, like the US, meaning you pay higher rates as you earn more. The calculation of PAYE tax is based on an individual’s income and tax code. The UK has an income band for income tax which increases as income increases.
Income tax band for 2024-2025
|
Taxable income |
Tax rate |
|
£12,570 and below |
0% – Personal allowance |
|
£12,571 – £50,270 |
20% – Basic rate |
|
£50,271 – £125,140 |
40% – Higher rate |
|
£125,141 and above |
45% – Additional rate |
Alongside income tax, National Insurance (NI) contributions are also calculated and deducted under the PAYE system. These contributions are calculated as a percentage of earnings above a certain threshold.
How is National Insurance (NI) connected to PAYE?
PAYE is the system that collects National Insurance (NI) automatically from wages. So, employers deduct both NI and income tax from employees before they are paid. NI is calculated with income tax in order to get the amount the employers need to report.
National Insurance contributions fund UK social benefits, including the state pension, NHS, and unemployment benefits.
Who is required to follow PAYE taxation?
Employers in the UK must comply with PAYE taxation if they have employees earning above the personal allowance. This system applies to all types of employment, including full-time, part-time, temporary, and casual workers.
So if an individual is receiving a salary or wage as an employee, it falls under PAYE, meaning their employer is responsible for deducting income tax and National Insurance contributions from their earnings.
The PAYE system applies to various types of employment income, such as:
- Salary or wages: The regular payments an employee receives for their work.
- Bonuses and commission: Additional earnings based on performance or sales.
- Overtime pay: Extra pay for hours worked beyond the normal working hours.
- Statutory payments: Such as statutory sick pay or maternity/paternity pay.
- Benefits in kind: Non-cash benefits like company cars, accommodation, or health insurance.
What are common issues I could encouter with PAYE?
Here are common problems encountered with PAYE:
- Overpayment of taxes: You can check your tax code and contact HMRC for corrections. There is also a UK tax calculator on Gov.uk to check your tax liability.
- Underpayment of taxes: The HMRC will eventually adjust your tax code to collect the unpaid amount gradually. For this one, you can request to pay in installments.
- Emergency tax code: You can provide your employer with your P45 (from your previous job). And if you don’t have a P45, you can complete HMRC’s Starter Checklist.
- Employer not deducting PAYE: You can report the issue to HMRC or check your employment status.
- Wrong tax code: You can check your payslip and update via HMRC Personal Tax Account.
What actions should employees take regarding PAYE?
- Check payslips regularly: Employees should review their payslips to ensure that the correct amounts are deducted for income tax and National Insurance (NI).
- Verify tax codes: Each employee is assigned a tax code by HMRC, which determines the amount of tax withheld from their income. It is important to confirm that the tax code is correct to prevent overpayment or underpayment of taxes.
- Report any changes: Employees should inform their employer or HMRC about any changes that might impact their tax situation, such as starting a new job, taking on additional income, or changes in employment status.
- Review the annual tax summary: HMRC provides an annual tax summary, which employees should check to ensure accuracy in their tax payments and contributions.
