How PAYE Collects Income Tax: UK 2026/27 Guide

Pay As You Earn (PAYE) is the system employers and pension providers use to deduct Income Tax from pay before it reaches you. HMRC issues or calculates a tax code, payroll applies it to taxable pay each period, and the employer reports deductions through Real Time Information.

How PAYE works step by step

1. HMRC determines a tax code using allowances, estimated income, benefits and earlier underpayments.
2. The employer applies the code to taxable pay in payroll software.
3. Income Tax and employee National Insurance are calculated.
4. The employer sends a Full Payment Submission to HMRC on or before payday.
5. Net pay is paid to the employee.
6. The employer pays PAYE and National Insurance to HMRC by the relevant deadline.

What is a tax code?

A common code such as 1257L reflects the standard Personal Allowance, but codes vary. Letters and prefixes can indicate Scottish or Welsh status, multiple jobs, no allowances, benefits, untaxed income or emergency treatment.

The code is not proof that the final annual tax is correct. It is a collection mechanism based partly on estimates.

Cumulative and non-cumulative codes

A cumulative code considers pay and tax from earlier periods in the tax year, allowing payroll to correct some over- or under-deductions. A week 1 or month 1 code treats each pay period independently and does not make those catch-up adjustments.

What income goes through PAYE?

• salary, wages, overtime, bonuses and commission;
• statutory payments and taxable termination amounts;
• many occupational and private pensions;
• some taxable benefits processed through payroll;
• certain earlier underpayments or untaxed income collected through coding.

Benefits reported on form P11D can affect the following year’s code. Student loans and workplace pension deductions can also run through payroll but are not Income Tax.

Starting a new job

Give the new employer a P45. If none is available, complete the starter declaration accurately. An emergency code may temporarily apply where HMRC or payroll lacks information. Check the first payslip and Personal Tax Account.

Having two jobs or pensions

Each source has its own code, but the Personal Allowance should not be duplicated. HMRC may allocate the allowance between sources. BR, D0 or D1 codes can collect tax at a single rate from a secondary source, but they can be wrong where total income differs from the estimate.

Scottish and Welsh taxpayers

An “S” prefix indicates Scottish Income Tax rates for relevant income, while “C” identifies a Welsh taxpayer. Residence rules determine status, not the employer’s location. Savings and dividend income generally use UK-wide rates.

How does HMRC learn about pay?

Employers report pay, tax, National Insurance, starter and leaver information through Real Time Information. HMRC combines these submissions with pension, benefits and other data. Delayed or duplicated payroll records can still create incorrect codes.

What if PAYE deducts too much or too little?

1. Check gross pay, taxable pay and the tax code on the payslip.
2. Compare the coding notice with actual jobs, pensions, benefits and allowances.
3. Ask payroll whether it used HMRC’s latest code.
4. Update estimated income or benefits through the Personal Tax Account where appropriate.
5. Contact HMRC if information is wrong or duplicated.

A corrected cumulative code can refund overpaid tax through payroll. Otherwise HMRC may reconcile after the tax year and issue a P800 or require Self Assessment.

Does PAYE remove the need for Self Assessment?

Usually for straightforward employment or pension income, but not always. Untaxed income, gains, self-employment, property, foreign income, certain reliefs or an HMRC notice can still require a return.

See whether PAYE-only employees need Self Assessment.

Employer deadlines

The FPS is normally due on or before payday. PAYE payments are usually due by the 22nd after the tax month or quarter when paid electronically, or the 19th for non-electronic payment. Some small employers can qualify for quarterly payment.

Documents to keep

• payslips and coding notices;
• P45 when leaving;
• P60 after the tax year;
• P11D or payrolled-benefit information;
• expense and relief claim evidence;
• HMRC calculations and repayment records.

Official guidance

• HMRC: how Income Tax is paid
• HMRC: tax codes
• HMRC: PAYE for employers

This guide is general information. Check payroll and HMRC records for your circumstances.