What Is PAYE?
By PayMetric Labs Research Desk
Short answer
PAYE (Pay As You Earn) is HMRC's system for collecting Income Tax and National Insurance directly from your salary before you're paid, so most employees never file a tax return.
Under PAYE, your employer calculates your tax and NI liability every pay period using your tax code, deducts it automatically, and pays it to HMRC on your behalf. Your tax code (something like 1257L for the standard 2026/27 Personal Allowance) tells your employer how much of your pay is tax-free.
PAYE applies to salary, most bonuses, and benefits processed through payroll. It's designed to spread your tax liability evenly across the year rather than landing as one large bill. If your tax code is wrong, for example after a job change or if you have income from multiple sources, you can end up overpaying or underpaying, which HMRC usually corrects via your next tax code or a refund.
Contractors working through an umbrella company are also taxed via PAYE, even though they're technically employed by the umbrella rather than the end client. This is different from limited company contracting, where only the salary portion goes through PAYE and dividends are taxed separately.
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This glossary entry is for general information only and does not constitute financial, tax, or legal advice. Rates and thresholds shown reflect current published guidance and may change.