What is PAYE Tax?
How is PAYE Calculated?
In the UK, you're given a tax code that your employer will base your PAYE payments on. Your tax code lists the tax-free Personal Allowance that almost everyone gets. It also notes any other circumstances affecting the tax you pay. It's really important to make sure your tax code is correct. Having the wrong code can lead to you paying the incorrect Tax rates and therefore too much tax, or even missing out on your Personal Allowance altogether! See here for more information about tax codes.
UK PAYE Tax Band System
Depending on your income, you will be taxed in accordance with the UK Tax Band system:
Band: Personal Allowance - Taxable Income (Up to £12,570) - Tax Rate: 0%
Band: Basic Rate - Taxable Income (£12,571 to £50,270) - Tax Rate: 20%
Band: Higher Rate - Taxable Income (£50,271 to £150,000) - Tax Rate: 40%
Band: Additional Rate - Taxable Income (Over £150,000) - Tax Rate: 45%
Example of how tax is calculated
James earns £18,000 per year and is paid every month (£1,500 per month before tax). He is on standard tax code 1257L and does not receive any other income.
This tax code
tells James' employer that he is entitled to a tax-free allowance of £12,570 a year (£1,047.50 a month).
Every month James' tax is calculated on £452.50 at 20% (his £1,500 monthly salary less his monthly tax-free allowance £1,047.50) which gives £90.50 per month PAYE tax, or £1,086 for the year*.
* based on James not being entitled to any other taxable benefits and expenses or receiving any other income.