Pay-As-You-Earn (PAYE)

PAYE is the system by which the tax man collects revenue from people who are employed, i.e. working for an organisation which pays them a salary. The income tax due is deducted at source and then passed on to the Inland Revenue.

This mechanism for bringing in tax is liked by the Inland Revenue because it effectively means employers act as unpaid tax collectors. The onus on seeing that the correct amount of tax is paid is on the employer.

PAYE was first introduced in 1944 having been created by Sir Kingsley Wood, Chancellor of the Exchequer in Churchill's wartime cabinet. On the day it was due to be announced in the Commons, Wood dropped dead.

The amount of tax an employer pays over for each member of staff will depend on such factors as:

• the person's salary
• whether they're married
• the allowances they're entitled to
• the deductions which need to be made

All the key information relating to how much tax you'll pay as an employee is encapsulated in your tax code. This is sent to you by your local tax office usually in January or February giving details for the financial year ahead which begins every 6th of April.

At the end of the tax year, each employee receives a summary of their earnings from their employer. This is shown in a standard Inland Revenue form called a P60. In the event of you leaving your PAYE job, you'll receive another standard form showing your earnings for the current tax year up to that date. This is a P45. When you are paid under PAYE, you're sometimes referred to by accountants as paying tax under 'Schedule E'.

The Inland Revenue publishes a wide range of free explanatory booklets on many aspects of tax. They're often well written - some of them have won plain English awards - they're available from your local tax office, or via the Inland Revenue website.

See also our guide to saving tax.

Last Updated: February 2008 © Moneyextra.com

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