PAYE meaning: how Pay As You Earn works

By the HRPricing editorial teamReviewed October 18, 2026How we research and score

PAYE (Pay As You Earn) is HMRC's system for collecting Income Tax and National Insurance from wages: the employer deducts both each payday, reports to HMRC on or before payday and pays HMRC, usually monthly (GOV.UK, checked October 18, 2026). "Earn as you pay" searches mean the same thing. For 2026 to 2027 the personal allowance is GBP 12,570 and the basic rate is 20%.

PAYE (Pay As You Earn) is the UK system in which employers deduct Income Tax and National Insurance from employees' pay and send it to HMRC.

What employers do under PAYE

  • Register with HMRC if anyone is paid GBP 96 or more a week, gets expenses or benefits, has another job or receives a pension.
  • Deduct Income Tax and employee National Insurance, plus student loan and pension deductions where they apply.
  • Report pay and deductions on or before each payday.
  • Pay HMRC monthly, or quarterly if you expect to owe less than GBP 1,500 a month.

The employee's tax code tells payroll how much tax-free pay to allow. The standard code for 2026 to 2027 is 1257L; 1257L W1, M1 and X are emergency codes used until HMRC sends the right one.

Example: a GBP 30,000 salary

PAYE on GBP 30,000 in England, 2026 to 2027, before pension
LinePer yearPer month
Income Tax: 20% of (30,000 minus 12,570)GBP 3,486GBP 290.50
Employee National Insurance: 8% of (30,000 minus 12,570)GBP 1,394.40GBP 116.20
Take-home before pensionGBP 25,119.60GBP 2,093.30
Employer National Insurance: 15% of (30,000 minus 5,000)GBP 3,750GBP 312.50

Source: GOV.UK, Rates and thresholds for employers 2026 to 2027, last updated Sept 1, 2026, checked Oct 18, 2026. Scotland uses its own Income Tax bands (19% to 48%).

Automatic enrollment pension adds at least 5% from the employee and 3% from the employer on qualifying earnings between GBP 6,240 and GBP 50,270. The employer's total is on our UK EOR page, with pay levels in UK salary data and leave rules in UK leave.

PAYE for a US company hiring in the UK

To pay a UK employee yourself you register as an employer with HMRC and run PAYE through UK payroll software. A US company with one or two UK staff can use an employer of record instead, which runs PAYE under its own registration. Contractors often work through an umbrella company, which also uses PAYE. The US version of the same idea is federal income tax withholding plus FICA, set by the Form W-4 rather than a tax code; see US payroll taxes and Form W-4.

Frequently asked questions

What is PAYE tax?
PAYE is not a separate tax. It is the system HMRC uses to collect Income Tax and National Insurance from wages: the employer deducts them each payday and pays them to HMRC.
What is PAYE for employers?
Employers must register with HMRC if anyone is paid GBP 96 or more a week (or has benefits, a pension or another job), deduct tax and National Insurance, report on or before each payday and pay HMRC, usually monthly.
How much PAYE tax is taken from GBP 30,000?
In England for 2026 to 2027, Income Tax is GBP 3,486 a year (GBP 290.50 a month) and employee National Insurance is GBP 1,394.40 (GBP 116.20 a month), using the GBP 12,570 allowance and the 20% and 8% rates.
What is an emergency tax code?
It is a temporary code, 1257L W1, 1257L M1 or 1257L X for 2026 to 2027, that payroll uses when HMRC has not yet issued the employee's correct code.
Is there PAYE in the US?
Not by that name. US employers withhold federal income tax based on Form W-4 and withhold and pay Social Security and Medicare (FICA), which works the same way as PAYE.
Sources (3)
  1. GOV.UK: PAYE and payroll for employers (checked Oct 18, 2026)
  2. GOV.UK: Rates and thresholds for employers 2026 to 2027 (checked Oct 18, 2026)
  3. GOV.UK: Workplace pensions: what you, your employer and the government pay (checked Oct 16, 2026)

This page is general information, not tax, legal or accounting advice. Rules and rates change, so check the official source linked above before you file or sign a contract. Read our disclaimer.