PAYE: how tax is deducted from your pay and what every line on your payslip means

PAYE stands for Pay As You Earn. Your employer deducts income tax and National Insurance contributions from your pay before it reaches your bank account. The deduction is calculated based on your tax code, which HMRC sends to your employer.

Each month (or week, for weekly-paid employees), your employer calculates what you owe based on your cumulative earnings for the year and your tax code. The system aims to collect exactly the right amount of tax across the full tax year, so that by April 5 you have paid neither too much nor too little.

HMRC does not contact most employed people directly about their tax — if everything is correct, your employer handles the deductions and HMRC receives them automatically. You only hear from HMRC if there is a discrepancy: an underpayment, an overpayment, or a change in your circumstances.

Most payslips show the same core information, though the layout varies by employer. Here is what each line means:

Gross pay — your total earnings before any deductions. This is the headline figure your employment contract refers to.

Income tax — the amount deducted based on your tax code and earnings to date in the year. If this looks too high or too low, your tax code may be wrong.

National Insurance (employee contribution) — your Class 1 employee NI contribution, deducted on earnings above the Primary Threshold. NI rates and thresholds are set by HMRC and change each April. Verify current rates at GOV.UK National Insurance.

Pension contributions — if you are enrolled in a workplace pension (under auto-enrolment rules), your contribution is deducted here. The minimum employee contribution and auto-enrolment thresholds are set by law — verify current amounts at GOV.UK.

Student loan repayments — if you have a student loan and your income is above the repayment threshold for your plan, repayments are deducted here. Different plans have different thresholds. Verify the threshold for your plan at GOV.UK student loan repayments.

Net pay — what you actually receive. This is gross pay minus all deductions.

If any deduction looks wrong, start with your tax code — that is the most common source of PAYE errors.

A P60 is an end-of-year summary from your employer showing your total earnings and the total tax and NI you paid in that tax year. Your employer must provide a P60 by 31 May after the end of the tax year.

You will need your P60 for:

• Mortgage and loan applications (lenders use it to verify income)
• Self Assessment tax returns (if you file one)
• Tax credit or benefit claims
• Checking whether you paid the right amount of tax

Your P60 is sometimes given as a paper document and sometimes provided online through your employer's payroll system. If you cannot find it, ask your employer's payroll or HR team.

If you believe you paid too much tax and want to claim a refund, your P60 is the document that shows HMRC what you paid.

A P45 is the document your employer gives you when you leave a job. It shows your earnings and the tax you paid up to the point you left.

A P45 has three parts: Part 1 goes to HMRC, Part 1A is your copy, and Parts 2 and 3 go to your new employer. Give Parts 2 and 3 to your next employer when you start — this allows them to put you on the correct tax code from day one. If you do not provide a P45, your new employer will put you on an emergency code (W1 or M1) until HMRC catches up, which can lead to overpaying tax temporarily.

Your previous employer must provide a P45 when you leave. If they fail to do so, contact HMRC.

You may have overpaid tax through PAYE in a number of situations:

• You were put on an emergency tax code for part of the year
• You left a job partway through the tax year and received less income overall than expected
• You had multiple jobs and your personal allowance was not applied correctly
• HMRC had incorrect information about your income or circumstances

At the end of the tax year, HMRC reconciles what you were deducted against what you should have paid. If you overpaid, HMRC will issue a P800 calculation showing you are owed a refund.

If you receive a P800 saying you are owed tax back, you can claim the refund through your Personal Tax Account, or HMRC may send a cheque automatically. Do not wait years to claim — there is a time limit for claiming refunds (usually four years from the end of the tax year). Claim a tax refund on GOV.UK.

If you think you have overpaid but have not received a P800, you can contact HMRC directly or check through your Personal Tax Account.

Your tax code appears on your payslip, typically as a number followed by a letter (e.g. 1257L). The number represents your tax-free income divided by ten; the letter tells HMRC and your employer what type of allowance to apply.

Common reasons a code might be wrong:

• HMRC applied benefits in kind (company car, private health insurance) from a previous job
• You had multiple jobs and the personal allowance was applied to both
• You were put on an emergency code when you started a new job and it was never updated
• HMRC has out-of-date information about another income source

If your code looks wrong, you can tell HMRC directly through your Personal Tax Account, which will update your code, or by calling the Income Tax helpline. Your employer then receives a new tax code automatically.

For a full explanation of what tax codes mean, see Tax codes explained.