If you're employed in the UK, you've almost certainly never calculated your own income tax — PAYE does it automatically, before the money even reaches your bank account. Here's what's actually happening behind the scenes.
What PAYE actually does
Pay As You Earn is the system employers use to deduct income tax and National Insurance directly from your salary each pay period, then send it straight to HMRC. Instead of paying a lump sum at year-end like self-employed people do, employees pay gradually, spread evenly across the tax year.
Your tax code is the key
Every employee has a tax code — usually something like 1257L — which tells your employer how much of your income is tax-free before PAYE starts deducting. The numbers usually represent your tax-free Personal Allowance divided by 10.
Common tax code letters
- L — Standard Personal Allowance
- BR — All income taxed at basic rate (often used for a second job)
- K — Deductions exceed your allowance (e.g., you owe tax from a previous year)
- 0T — No allowance applied, often a temporary code until HMRC has full details
It's cumulative, not per-payslip
PAYE typically works cumulatively across the tax year — each pay period, HMRC's calculation looks at your total pay and tax paid so far in the year, not just that single payslip in isolation. This is why your tax deduction can look slightly different if you get a bonus or a pay rise partway through the year — the system is catching up your cumulative position.
What to check on your payslip
- Your tax code — make sure it matches what HMRC has on record (check your Personal Tax Account)
- Gross pay vs. taxable pay — pension contributions and some benefits reduce taxable pay before tax is calculated
- Tax and NI deducted — compare against our calculator to spot anomalies
Check your payslip numbers against an independent calculation.
Use the Take-Home Pay Calculator →If your tax code looks wrong
An incorrect tax code is one of the most common reasons people overpay or underpay tax through PAYE — often from an old job, an unreported benefit, or a change in circumstances HMRC hasn't caught up with yet. If something looks off, you can check and update it directly through your HMRC Personal Tax Account.
This is a general explanation of how PAYE works, not personalized tax advice. If you believe your tax code is wrong, contact HMRC directly to correct it.