For employees and contractors navigating the UK tax system, understanding exactly how and when income tax is deducted is essential. A common question arises: Should I be paying PAYE tax, or is it my employer’s responsibility?
The Pay As You Earn (PAYE) system does not change who owes the tax, but it strictly dictates how HMRC collects it. This guide outlines the legal liabilities, the 2026/27 tax thresholds, and how specific circumstances—such as working through umbrella companies or receiving expense reimbursements—affect your PAYE position.
1. Statutory Liability: Who Actually Owes the Tax?
Under section 13(1) and (2) of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003), the person legally liable for any tax on general earnings is the employee to whose employment the earnings relate.
However, the UK tax system does not rely on employees to voluntarily transfer these funds. Instead, Part 11 of ITEPA 2003 establishes the PAYE system, which mandates that the employer acts as the tax collector on behalf of HMRC. Employers must deduct tax from their employees’ salaries in accordance with the tax code provided by HMRC and remit those funds directly to the government. Therefore, while you (the worker) bear the economic burden of the tax, your employer bears the legal responsibility for calculating and deducting the PAYE tax at the point of payment.
2. When Does PAYE Kick In? The 2026/27 Thresholds
You only start paying PAYE tax once your earnings exceed the tax-free limit set by Parliament.
For the 2026/27 tax year, the government has frozen the Personal Allowance at £12,570. An employer must apply the rules in the Income Tax (Pay As You Earn) Regulations 2003 to determine if a payment breaches the PAYE threshold. For a standard employee paid monthly, the monthly PAYE threshold is calculated as 1/12th of the personal allowance. With a £12,570 allowance, this equates to a monthly threshold of £1,048. If your monthly earnings fall below this figure, your employer will not deduct income tax.
3. How Much Will I Pay? Rates and National Insurance
If your earnings exceed the £12,570 threshold, your employer will deduct tax and National Insurance Contributions (NICs) based on your income band.
Income Tax Rates (2026/27)
Section 2 of the Finance Act 2026 sets the main rates of income tax for the 2026/27 tax year as follows:
- Basic Rate: 20% on earnings above the Personal Allowance.
- Higher Rate: 40% on earnings above the basic rate limit (which results in a higher rate threshold of £50,270).
- Additional Rate: 45% on earnings above the additional rate threshold.
Note for Scottish Taxpayers: If you are a Scottish taxpayer, you do not use the standard UK rates. Instead, the Scottish Parliament sets specific income tax bands ranging from a 19% Starter Rate up to a 48% Top Rate.
National Insurance Contributions (NICs)
Alongside income tax, the PAYE system captures Class 1 NICs.
- The Employee (Primary) Liability: For 2026/27, the Primary Threshold remains aligned with the Personal Allowance at £12,570. Employees pay Class 1 NICs at a rate of 8% on earnings between £12,570 and the Upper Earnings Limit of £50,270.
- The Employer (Secondary) Liability: Your employer must also pay out of their own pocket. From 6 April 2025, the Secondary Threshold dropped to £5,000, and the employer contribution rate increased to 15%. This employer tax is calculated on your earnings but is not deducted from your gross pay.
4. Special Circumstances: Umbrellas, Expenses, and Cancelled Shifts
The application of PAYE can become complex depending on your contract structure and the nature of the payments you receive.
- Umbrella Companies and Recruitment Agencies: If you contract through an umbrella company, they are legally your employer and must operate PAYE on your earnings. From 6 April 2026, new rules clamp down on non-compliant umbrella companies. If an umbrella company fails to pay the deducted PAYE tax to HMRC, the liability can be transferred up the supply chain, meaning recruitment agencies or end-clients now face joint and several liability for the unpaid tax.
- Cancelled Shifts: If an employer pays you compensation for a cancelled shift, this payment derives directly from your employment relationship and generally remains taxable as PAYE income.
- Mileage and Expense Reimbursements: Not all payments you receive are subject to PAYE. Employers can reimburse specific expenses tax-free, provided they fall within approved limits. For example, if you use your own vehicle for business travel, your employer can pay you 55p per mile for the first 10,000 miles without triggering any PAYE tax or NICs.
Summary Table: PAYE Rules 2026/27
| Entity / Element | Provision / Event | 2026/27 Amount / Rule | Outcome |
|---|---|---|---|
| Individual Worker | Tax Liability | s13 ITEPA 2003 | The employee is legally liable for the tax on their employment income. |
| Employer | Tax Collection | PAYE Regulations | The employer is responsible for calculating, deducting, and remitting the tax to HMRC. |
| PAYE Tax | Income Tax Rates | £12,570 Personal Allowance | Earnings above £1,048/month are taxed at 20%, 40%, or 45%. |
| Scottish Taxpayer | Devolved Tax Rates | 19% to 48% | Scottish taxpayers face a different progressive tax scale. |
| National Insurance | Employee Class 1 | 8% Rate | Deducted on earnings above the £12,570 Primary Threshold. |
| National Insurance | Employer Class 1 | 15% Rate | Employers pay 15% on earnings above the £5,000 Secondary Threshold. |
| Umbrella / Agency | Joint & Several Liability | 6 April 2026 onwards | Agencies become liable if the umbrella company fails to remit PAYE tax to HMRC. |
| Earnings | Cancelled Shifts | Contractual Payouts | Treated as taxable earnings subject to standard PAYE deductions. |
| Reimbursements | Business Mileage | 55p per mile | Exempt from PAYE up to 10,000 miles; no tax or NICs due. |
For completeness, practitioners should audit their clients’ payroll systems to ensure the new £5,000 secondary NIC threshold is correctly applied and review the supply chain contracts of any temporary workers to mitigate the new joint and several liability risks involving umbrella companies.
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