What is PAYE?
Definition of PAYE
PAYE is short for Pay As You Earn. It's not a tax in its own right, it's a system that HMRC use to collect income tax.
The PAYE system is used to collect tax from certain sources of income, such as wages, and private pensions.
Most UK taxpayers are entitled to receive a certain amount of income tax-free each year. This is called the 'personal allowance'. If your income is over a certain level, your personal allowance is reduced proportionately. HMRC will take your personal allowance into account when they work out how much of your income to tax.
How PAYE works:
If your only income is a salary of £25,000 a year, and you are entitled to a personal allowance of £10,000, then HMRC will collect tax on the remaining £15,000 of your salary under the PAYE system.
Your employer must deduct this tax from your monthly wages and pay it over to HMRC.
At the same time your employer must also deduct employee's National Insurance from your wages and pay that over to HMRC too.
Submitting PAYE to HMRC
You can run your monthly payroll through FreeAgent's online accounting software and file your PAYE and NI to HMRC in real time.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.