PAYE Explained: UK Pay As You Earn (2026/27)

PAYE is how HMRC collects Income Tax and NI from your salary each month. How it works, what your tax code does, and how to check you're being taxed correctly.

PAYE (“Pay As You Earn”) is the UK system that collects Income Tax and National Insurance from your wages and pensions automatically, each time you’re paid. If you’re employed you almost certainly interact with PAYE every month — this guide walks through how it actually works, what your tax code means, and what to do if something looks wrong.

The one-sentence version

Your employer calculates your Income Tax and employee National Insurance from your pay, sends the money to HMRC on your behalf, and gives you the rest as take-home. No self-assessment needed for most people.

What PAYE covers

PAYE handles three deductions from your gross pay:

  1. Income Tax — worked out from your tax code (which encodes your Personal Allowance)
  2. Employee National Insurance — Class 1, currently 8% on earnings between £12,570 and £50,270 and 2% above (rates unchanged for 2026/27)
  3. Student loan repayments if applicable — 9% on earnings above your plan’s threshold (6% for Postgraduate)

PAYE does not cover:

  • Pension auto-enrolment contributions (separate deduction, your employer and/or the scheme handles it)
  • Voluntary benefit deductions like cycle-to-work or share schemes
  • Self-assessment items (rental income, dividends over £500, self-employment profits) — those go on a separate tax return

Your tax code — the single most important PAYE input

HMRC issues every employee a tax code. The code tells your employer exactly how much tax-free Personal Allowance to apply before calculating Income Tax.

For 2026/27 the standard code is 1257L: 1257 × 10 = £12,570, which is the UK Personal Allowance. The “L” suffix signals the default allowance with no adjustments.

Other common 2026/27 codes:

  • BR — Basic Rate: every pound taxed at 20%, no PA (usually a second job)
  • D0 — all at 40% higher rate
  • D1 — all at 45% additional rate
  • K-prefix (e.g. K475) — negative allowance; deductions exceed your PA
  • 0T — no PA, bands still apply (often temporary, new job without P45)
  • NT — no tax deducted (rare; certain non-resident / estate scenarios)
  • W1 / M1 / X suffix — emergency, non-cumulative (each pay period taxed in isolation)
  • S-prefix (e.g. S1257L) — Scottish rates apply above the PA
  • C-prefix — Welsh rates (currently identical to the rest of the UK)

Dedicated detail pages: see the tax code explainer for each letter, plus an emergency code walk-through.

How Income Tax is calculated each pay period

Your employer uses a cumulative method by default: at each payroll they work out your year-to-date gross pay, year-to-date PA used, and therefore year-to-date Income Tax owed. Whatever you’ve already paid this year is deducted, and the balance comes out of this period’s pay.

This smooths out dips and bonuses. If you didn’t work for two months and had unused PA sitting there, your next pay period applies more PA and less tax — automatic reconciliation. Emergency codes (W1/M1/X) disable this and run each period in isolation until HMRC has the full year-to-date picture.

2026/27 tax bands (England, Wales, Northern Ireland)

BandRateRange
Personal Allowance0%£0 – £12,570
Basic rate20%£12,571 – £50,270
Higher rate40%£50,271 – £125,140
Additional rate45%£125,141 and above

Personal Allowance tapers by £1 for every £2 of income above £100,000, reaching zero at £125,140.

Scotland uses six bands including Starter (19%) and Advanced (45%) rates — see the Scottish Income Tax guide for the current 2026/27 Scottish bands.

Forms you’ll see through PAYE

P45 — issued when you leave a job. Shows year-to-date PAYE and your last tax code. Give it to a new employer so they set you up on a cumulative code.

P60 — issued after each tax year ends (by 31 May). Your annual PAYE summary; the document you use for mortgage applications, Student Loans refund claims, pension contribution references.

P11D — issued if you receive taxable benefits (company car, medical insurance, interest-free loan). Separate from PAYE but HMRC usually adjusts your tax code to collect the extra tax on those benefits.

Starter Checklist — completed at a new job when you don’t have a P45. You declare your employment situation; HMRC uses it to issue the right tax code.

How to check you’re being taxed correctly

  1. Check your payslip — does the tax code match what HMRC has on file?
  2. Log into your Personal Tax Account — shows the exact breakdown HMRC used for your code, including benefits and any tax owed from prior years.
  3. Run your salary through our salary calculator — enter your gross, pick 2026/27, add pension + student loan if applicable. The take-home shown should match your payslip within pence. If it’s significantly different, check for untracked benefits or a wrong tax code.
  4. Check P60 vs estimates — after year-end, compare your P60 against our calculator’s annual take-home. Differences of more than £100-200 warrant investigation.

What to do if your PAYE looks wrong

Small over/underpayments within a tax year normally correct themselves through cumulative PAYE over subsequent pay periods. For larger issues:

  • Over-paid tax: at year-end HMRC issues a P800 letter with automatic refund (bank transfer or code adjustment). You can also request a refund via the Personal Tax Account.
  • Under-paid tax: HMRC normally adjusts the following year’s tax code to collect. For larger amounts (over £3,000) they may require self-assessment.
  • Wrong tax code mid-year: contact HMRC on 0300 200 3300 or update details through your Personal Tax Account — HMRC sends a new code to your employer within 2-3 pay periods.

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