The PAYE system, which stands for Pay As You Earn, is a mechanism of making sure that people pay their income and National Insurance contributions. PAYE works by the employer deducting the right amount of tax and National Insurance amounts from the employee’s wages, or pension, and provides it to HMRC before paying the employee their wage.
When a tax year concludes, the employee should receive a form entitled P60, and this details the full amount of money paid to the employee and the amount of tax that has been deducted.
The employer knows how much money to deduct from an employee’s wages through the use of a tax code. HMRC provides this tax code to the employer, and this informs them how much money should be deducted from the wages or pension of the employee. The PAYE code is broken down as follows:
- The number details the income held as allowances that can be offset against tax.
- The letter refers to the allowances that you receive.
The letters in the tax code include L, P, Y, T, K, BR, NT, DO or OT. All of these codes have a specific meaning, and this details how much tax a person should or should not be paying.
Anyone looking to check what PAYE tax code they have received should check their payslip or pension slip or any correspondence that they may have received from HMRC.
Sometimes HMRC applies an emergency tax code
There will be times when HMRC is not able to provide your employer with the right tax code, and in this case, they will provide an emergency tax code. This tax code means that you will only be entitled to the basic allowances, which means that you may pay too much tax for a short period of time. Emergency tax codes generally include the letter L. Whenever your tax code is updated, the amount of money being taken from your wages or pension will revert to normal.
If you are an independent contractor or you are self-employed, you may have concerns about dealing with tax and National Insurance payments. Given the penalties associated with non-payment and the stress that many people feel when dealing with HMRC, it is natural that self-employed professionals or contractors will look for support and guidance. For many professionals, dealing with tax is outside of their comfort zone, and this is when it makes sense to obtain expert help.
Setting up an umbrella PAYE account removes a lot of the stress of the situation while ensuring that you are paying the amount of money that you should be paying. Peace of mind is always worth considering, especially when it comes to keeping the taxman off your back.
While no one likes the idea of paying taxes, PAYE is a convenient solution that removes a lot of stress and hassle from the situation for many people. Taking the time to learn about PAYE and how it can make your life easier is a smart move for most professionals.