PAYE stands for Pay As You Earn. It is the system used in the UK to collect Income Tax from employment income as workers are paid. Employers operate PAYE through payroll, calculating the Income Tax and National Insurance due before paying an employee their net wages.
Instead of employees having to save money and make a large Income Tax payment later, PAYE spreads tax deductions across their weekly, fortnightly or monthly pay. The amount deducted depends on factors such as earnings, tax code, Personal Allowance and individual circumstances.
For most employees, PAYE means tax is dealt with automatically through their employer. For businesses, however, it creates responsibilities including registering as an employer when required, calculating payroll correctly, reporting information to HMRC and paying deductions by the relevant deadlines.
PAYE has existed for more than 80 years, but the system used today is very different from the largely paper-based process introduced during the Second World War.
Digital payroll, Real Time Information and further changes planned from 2027 continue to reshape how employment taxes are collected.
Why Was PAYE Introduced In The UK?
PAYE was introduced on 6 April 1944 during the Second World War. The number of people paying Income Tax had increased substantially, making the previous system of collecting tax annually or twice a year increasingly difficult to manage.
Before PAYE, workers could face a significant tax bill well after they had earned the income. This created difficulties for both taxpayers and the government.
PAYE changed that by allowing employers to deduct Income Tax directly from wages each week or month.
The main aims were to:
- Collect Tax Closer To When Income Was Earned
- Spread Tax Payments Throughout The Year
- Reduce Large Tax Bills For Employees
- Make Tax Collection More Efficient
- Use Employers To Administer Employment Tax Deductions
The principle behind the system remains largely the same in 2026. Tax is calculated as employees earn income rather than being left entirely until the end of the tax year.
How Did PAYE Change Income Tax And National Insurance Collection?
PAYE significantly changed the way Income Tax was collected because responsibility for making deductions moved largely into payroll.
Employers became responsible for calculating the tax due, deducting it from wages and passing it to the government.
Employees therefore received their salary after PAYE deductions rather than receiving their full gross salary and paying all of their employment Income Tax separately.
National Insurance developed separately from PAYE.
The modern National Insurance system began in 1948. A major change followed in 1975, when Class 1 National Insurance contributions became earnings-related.
Employers deducted employee contributions through PAYE arrangements, bringing Income Tax and National Insurance much more closely together within payroll administration.
Today, an employee’s payroll commonly deals with:
- Income Tax
- Employee National Insurance
- Workplace Pension Contributions
- Student And Postgraduate Loan Repayments Where Applicable
- Other Authorised Payroll Deductions
Employers may also have their own National Insurance liability in addition to amounts deducted from employees.
This means PAYE and payroll allow HMRC to receive employment-related tax information and payments throughout the year rather than relying mainly on later assessments.
PAYE Timeline: From Introduction To 2026
PAYE has gradually changed from a paper-heavy deduction system into a largely digital reporting system.
| Year | PAYE Development |
| 1944 | PAYE was introduced to deduct Income Tax from wages weekly or monthly |
| 1948 | Modern National Insurance system began |
| 1975 | Class 1 National Insurance became earnings-related and employer deductions were operated through PAYE arrangements |
| 2000s | Payroll software and online employer services became increasingly important |
| 2012 | HMRC began piloting Real Time Information |
| 2013 | Real Time Information was rolled out widely across employers |
| 2026 | PAYE is largely operated through payroll software with real-time digital reporting |
| 2027 | Mandatory real-time payrolling of certain benefits in kind is planned to begin |
| 2028 | Mandatory payrolling is planned to extend to most remaining benefits in kind |
Major PAYE Changes Over The Years
One of the largest changes was the shift from paper records and end-of-year reporting towards electronic payroll.
Modern payroll software can calculate tax, National Insurance and other deductions automatically using employee information, tax codes and current thresholds.
The introduction of digital tax accounts has also made it easier for employees to check tax codes, employment information and PAYE records.
Real Time Information And Digital Payroll
Real Time Information, commonly called RTI, represented one of the biggest changes to PAYE since its introduction.
Before RTI, employers generally supplied much more payroll information through year-end processes. Under RTI, employers normally send information to HMRC every time employees are paid.
The main report is the Full Payment Submission, or FPS.
It provides details such as employee pay, Income Tax and National Insurance deductions. Employers normally submit the FPS on or before payday.
An Employer Payment Summary, or EPS, is used in certain circumstances, including when an employer needs to claim particular reductions or has not paid employees during a tax month.
Real-time reporting gives HMRC more current information about earnings and tax deductions, helping to reduce the gap between when employees are paid and when their payroll information reaches HMRC.
How Are PAYE Deductions Calculated In 2026?
PAYE calculations are based on several factors rather than one fixed percentage.
For the 2026/27 tax year, the standard Personal Allowance remains £12,570 for eligible taxpayers.
For England, Wales and Northern Ireland, the main Income Tax rates applying above the Personal Allowance are:
| Income Tax Band | 2026/27 Rate |
| Basic Rate | 20% |
| Higher Rate | 40% |
| Additional Rate | 45% |
Scotland has separate Income Tax bands and rates, so Scottish taxpayers can have different PAYE calculations.
The employee’s tax code is also important. 1257L remains the standard tax code for many people receiving the full Personal Allowance through one employment or pension.
Emergency tax codes for 2026/27 can include 1257L W1, 1257L M1 and 1257L X. These can be used when HMRC or an employer does not yet have enough information to operate the normal cumulative tax calculation.
Income Tax, National Insurance And Tax Codes
Income Tax and National Insurance are separate charges even though employers usually calculate both through payroll.
For a standard Category A employee in 2026/27, employee National Insurance is generally:
- 0% On Earnings Up To The Primary Threshold
- 8% On Relevant Earnings Between The Primary Threshold And Upper Earnings Limit
- 2% On Relevant Earnings Above The Upper Earnings Limit
The annual Primary Threshold is £12,570, while the Upper Earnings Limit is £50,270.
Employers generally also pay employer National Insurance. The standard employer rate is 15% above the applicable Secondary Threshold, although different rules and reliefs can apply to some employees and employers.
PAYE Calculation Example For 2026/27
Consider an employee in England earning £2,500 per month, using tax code 1257L and standard Category A National Insurance.
A simplified calculation could look like this:
| Payroll Item | Approximate Amount |
| Gross Monthly Pay | £2,500.00 |
| Monthly Personal Allowance | £1,048.00 |
| Income Subject To Basic Rate Tax | £1,452.00 |
| Approximate Income Tax | £290.40 |
| Approximate Employee NI | £116.16 |
| Approximate Net Pay Before Other Deductions | £2,093.44 |
This example is simplified. Actual payroll can differ because of cumulative tax calculations, pension contributions, student loans, benefits, tax-code adjustments, bonuses and other circumstances.
How Does PAYE Work For Employees And Employers?
PAYE affects employees and employers differently.
For employees, most of the process happens automatically. The employer calculates deductions and provides a payslip showing gross pay, deductions and net pay.
Employees should still check their payslips and tax codes, particularly after changing jobs, receiving benefits, starting a second job or experiencing a significant change in income.
An incorrect or temporary tax code can result in too much or too little tax being deducted.
PAYE On Employee Payslips
A payslip should clearly show the employee’s pay before and after deductions.
It normally includes:
- Gross Pay
- Income Tax Deducted
- National Insurance Deducted
- Other Payroll Deductions
- Net Pay
Payslips can also show the employee’s tax code, National Insurance number, rate of pay and year-to-date figures.
If the amount of PAYE deducted looks unusual, checking the tax code is a sensible first step.
Starting Or Leaving A Job
When someone starts a new job, the employer needs enough information to establish the correct payroll treatment.
A P45 from the employee’s previous employment can provide important information about their previous pay and tax. If a P45 is not available, the employer may use starter information to determine how the employee should initially be taxed.
When an employee leaves, the employer completes the appropriate payroll reporting and provides a P45.
Employees who remain employed at the end of the tax year generally receive a P60, which summarises their taxable pay and tax deducted during that employment for the year.
Employer Registration, Reporting And Deadlines
Businesses normally need to register for PAYE when they meet HMRC’s employer registration conditions.
For the 2026/27 tax year, registration can be required where an employee:
- Is Paid £96 Or More Per Week
- Receives Expenses Or Company Benefits
- Receives A Pension Through The Employer
- Has Had Another Job During The Tax Year
- Has Received Certain Taxable State Benefits
Employers generally need to register before the first payday and obtain an employer PAYE reference.
Once PAYE is running, employers normally submit an FPS on or before each payday.
PAYE bills paid electronically are generally due by the 22nd of the following tax month. Employers who usually pay less than £1,500 per month may be able to arrange quarterly payments.
Employers must also retain PAYE records for at least three years from the end of the tax year they relate to.
How Has PAYE Improved Over The Years?
The basic idea behind PAYE has remained remarkably consistent since 1944, but its administration has changed substantially.
Originally, PAYE depended heavily on paper documentation and manual calculations. Modern systems use payroll software, digital tax codes and electronic reporting.
Several improvements have made PAYE more responsive.
More Frequent Reporting
RTI means HMRC receives payroll information around the time employees are paid instead of relying primarily on annual reporting.
Automated Calculations
Payroll software can apply tax codes, thresholds and National Insurance rates automatically, reducing the need for employers to perform every calculation manually.
Improved Employee Visibility
Digital services allow employees to review information about their employment and tax position more easily than was possible under a paper-only system.
Faster Tax-Code Adjustments
Updated information can be reflected through payroll during the tax year, helping HMRC correct some overpayments or underpayments sooner.
Better Integration With Other Deductions
Payroll can now deal with Income Tax, National Insurance, student loan deductions, pension contributions and several other obligations in one process.
The system is still not completely automatic. Incorrect employee information, multiple jobs, changing benefits or unusual income patterns can still create PAYE errors.
What Are The Future Plans For PAYE?
The direction of PAYE is towards more real-time reporting and greater use of payroll software.
One of the most important upcoming changes concerns benefits in kind.
PAYE Changes From April 2027
Under current government plans, mandatory real-time payrolling of certain benefits in kind will begin from 6 April 2027.
The first phase is expected to cover:
- Company Cars
- Car Fuel
- Vans
- Van Fuel
- Employer-Provided Medical Benefits
Rather than relying mainly on year-end reporting for these benefits, affected employers will report them through payroll software and account for the relevant tax in real time.
The changes are being introduced in phases to give employers and payroll providers additional time to prepare.
From April 2028, mandatory payrolling is planned to extend to most other benefits in kind. Employment-related loans and accommodation are being treated separately, with mandatory timing to be confirmed.
Further Digitalisation Of Payroll
PAYE has moved steadily towards faster and more detailed digital reporting.
Future development is likely to continue focusing on integrating information that has traditionally been dealt with after the end of the tax year into payroll during the year.
For businesses, this makes accurate payroll data increasingly important. Employers will need reliable software, current employee information and processes capable of dealing with benefits and tax changes in real time.
For employees, greater real-time reporting could make tax deductions more closely reflect their current employment circumstances, although taxpayers should still check their payslips and tax codes for errors.
Frequently Asked Questions About PAYE
Is PAYE The Same As Income Tax?
No. Income Tax is the tax charged on taxable income, while PAYE is the system employers use to calculate, deduct and report employment-related Income Tax as employees are paid.
Does PAYE Include National Insurance?
Employers operate Income Tax and National Insurance together through payroll and report them to HMRC.
However, National Insurance remains separate from Income Tax and has its own thresholds and rates.
When Was PAYE Introduced?
PAYE was introduced in the UK on 6 April 1944. It replaced less frequent Income Tax collection with deductions made from employees’ weekly or monthly wages.
Why Is My PAYE Tax So High?
A high deduction can result from increased earnings, bonuses, a changed or emergency tax code, reduced Personal Allowance, benefits, a second job or previous tax underpayments.
Checking the tax code shown on the payslip can help identify the reason.
Can PAYE Tax Be Refunded?
Yes. If too much Income Tax has been deducted, a refund may sometimes be made automatically through payroll after HMRC updates the tax code.
In other circumstances, HMRC may calculate and issue a refund separately.
Do All Employees Pay Through PAYE?
Most employees whose earnings and circumstances require Income Tax and National Insurance deductions are dealt with through PAYE payroll. However, not every employee will actually owe Income Tax, particularly where their taxable income remains within their available Personal Allowance.
Will PAYE Change After 2026?
Yes. One of the main planned changes starts in April 2027, when real-time payrolling becomes mandatory for certain benefits in kind. The system is expected to become increasingly integrated with digital payroll reporting as further reforms are introduced.
