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What is PAYE and how does it work?

Employees and pensioners have tax deducted under Pay As You Earn by means of what are called ‘PAYE codes’. You should check your code number and what tax is being taken off your income and query it with HMRC if you do not understand or think it might be wrong. We have some simple instructions for you to check your coding notice from HMRC for employees and pensioners.

PAYE stands for Pay As You Earn. It is the system for collecting tax from your earnings or pensions during the tax year. The tax year begins on 6 April in the year and ends on 5 April in the following year.

PAYE is a three-party process, involving HM Revenue and Customs (HMRC), your employer or pension provider and you. Each has a role in its operation.

In most cases the tax due from you can be taken off your pay or pension under the Pay As You Earn (PAYE) system. How often tax is taken off depends on how often you are paid – usually weekly or monthly for employees and most pensioners, but some pensions might only be paid quarterly or annually.

How PAYE works – the basics

HMRC will:

  •  calculate a tax code for you
  •  send you a PAYE coding notice (a form ‘P2’), if they are required to do so, showing you how they have worked out your tax codes. For cases where HMRC are not obliged to issue a coding notice you can still ask them for one
  • tell your employer or pension provider what your tax code is (but not how it has been worked out).

Your employer or pension provider then uses that tax code to work out how much tax to take off your weekly or monthly pay or pension. They regularly pay over that tax (and National Insurance contributions, if appropriate) to HMRC. You can view your tax code and how it has been calculated on the HMRC website through your Personal Tax Account.

Employers and Pension providers have procedures for running PAYE that allow them to use a tax code when paying you. It is important to check that your employer/pension provider has informed HMRC of your income. When new incomes start you should expect to see an updated coding notice from HMRC. If this doesn’t happen we suggest you contact HMRC and ask for one.

It is important to check that the tax codes HMRC have issued are being operated by your employer or pension provider. It can become more confusing in retirement as pensioners often have multiple sources of income including the taxable state pension that is paid gross. It is worth checking that the tax codes issued to you actually take the correct amount of tax. You can contact HMRC, go through your Personal Tax Account or contact us for help.


If you are employed you will be given a payslip each time you are paid. It may show the tax code your employer used to work out the tax to deduct from your gross pay.

If you are getting a pension, you generally do not get a payslip with each pension payment. However, you should get some form of notification if there is any change to the pension payment if, for instance, your tax code changes.

If you are unsure what code is being operated by your employer/pension provider call and ask.

The tax year end

So long as you are employed or receiving a pension at 5 April, the end of the tax year and pay tax, your employer or pension provider will give you an ‘end of year certificate’ (form P60 or its equivalent) by 31 May. This will show your pay or pension and the tax deducted and usually the final tax code operated. Your employer or pension provider will give the same information to HMRC.

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