Pay as you earn, PAYE

The PAYE system places the responsibility for collecting and accounting for an employee's income tax on the employer. This is done by deducting the required amount from an employee's gross pay and giving it to the Inland Revenue as Schedule E tax. The amount deducted must appear separately on employee pay statements.

Tax codes

To facilitate the PAYE system, the Inland Revenue issues each employee with a tax code. You can find the tax code from a:

P45 certificate: a three-part form available from an employee's last employer (or Social Security office if the employee was previously unemployed) stating the employee's tax code and total pay and total tax paid since the beginning of the current tax year
Local office of the Inland Revenue.

Tax codes consist of a number and a letter added as a suffix or prefix. The number represents one-tenth of the employee's annual tax allowance; the letter refers to the personal allowance to which he or she is entitled.

Examples of tax codes:

L: personal allowance (this is also used as an emergency tax code)
P: Personal allowance (age 65-74)
Y: Personal allowance (age 75 and over)
V: personal and married couple's allowance (age 65-74)
BR: basic-rate tax and no personal allowances (most commonly used for a second job).
NT: no tax to be deducted
D0: higher-rate tax

Where a tax code is temporarily unavailable, an employer may use an emergency tax code. This means the employee is on a fixed tax contribution, one-tenth of the lower personal allowance operated on a week-one basis. Where this contribution rate turns out to be too high, the employee should be remunerated for the overpayment by applying for a refund on a P47 form.

PAYE records required by law

The law requires that an employer keep the following records regarding pay and remuneration for not less than 3 years after the end of the year to which they relate:

P11: deductions working sheet - a rolling month-by-month record of an employee's PAYE and National Insurance contributions, including details of sick pay and maternity pay
P14: end of year return - a triplicate annual declaration of an employee's PAYE, National Insurance and other details of total payments made to employee, total net tax, employer's name and address and employee's name, National Insurance number and tax code (P60)
P15: coding claim form - issued to employees who do not provide a P45, this form enables the Inland Revenue to establish their correct tax code
P38(S): employment of students - allows organisations which employ students for vacation work to avoid deducting income tax or National Insurance contributions from their wages unless they earn above the lower earnings limit
P45: details of employee leaving - triplicate form completed by the organisation for each employee who leaves their employment, stating the earnings and deductions since the beginning of the current tax year to the date of leaving
P46: PAYE codes - employees must fill in this form if they fail to produce a P45
P47: application to refund tax - to be completed by employees who are eligible for a tax refund exceeding £100. Refund will be made on a P48 form
P50: tax repayment - to be completed by employees who leave but do not go directly to another job. Employers are only responsible for issuing this form
P85: employees leaving the country - issued to employees who are leaving a UK for any reason so that they may reclaim, or be relieved of, income tax payments
P160: retirement on pension to be submitted to Inland Revenue by the employer within 14 days of an employee retiring on a pension paid by the employer or on behalf of a superannuation fund or scheme