What Is PAYE (Pay As You Earn)?
HMRC's system for collecting income tax and National Insurance directly from employee pay before it reaches the worker.
Definition
Pay As You Earn (PAYE) is the HMRC system through which income tax and National Insurance contributions are deducted from an employee's wages before they are paid. Employers operate PAYE on behalf of HMRC, remitting the deductions each month. Each employee has a tax code (e.g. 1257L in 2026/27 for the standard personal allowance) that tells the employer how much tax-free income to allow. If your tax code is wrong you may pay too much or too little. PAYE also covers student loan deductions (Plans 1, 2, 4, 5, and Postgrad) and deductions for salary sacrifice schemes (such as pension contributions). Self-employed people do not use PAYE; they file a self assessment tax return instead.
Example
On a £35,000 salary with tax code 1257L, your first £12,570 is tax-free. You pay 20% on £22,430 = £4,486 income tax and 8% NI on £22,430 = £1,794, collected monthly via PAYE.