The Pay As You Earn (PAYE) system is a method of paying income tax and national insurance contributions. Your employer will automatically deduct tax and national insurance contributions from your wages or occupational pension before paying you your wages or pension which are paid directly to HMRC (HM Revenue & Customs).

Businesses need to register as an employer with HM Revenue and Customs to get a login for PAYE Online or authorise an agent such as an accountant. Employers are legally responsible for completing all PAYE tasks even if an agent is getting paid to do them. A non-resident company can’t set up a standard payroll scheme until it has business premises in the UK.

Businesses must pay the PAYE bill to HM Revenue and Customs by the 22nd of the month for all the salaries paid the previous month. A month is defined not as a calendar month but as a period between the 6th date of the month and the 5th date of the following month. Small employers that expect to pay less than £1,500 a month can arrange to pay quarterly. Please note that reports must be sent to HMRC before any payments to employees are made.

Your tax code is issued by HMRC and is used by your employer to work out how much income tax you should pay. This tax code changes every year and you may be paying the incorrect amount of tax if you’re on the wrong tax code. You are usually entitled to claim a rebate if you’ve paid too much.

HMRC uses a tax code to tell your employer or pension provider the amount that they will deduct from your wages or pension. If HMRC does not have enough information to issue a full tax code, your employer or pension provider will be told to use an emergency tax code until more information is received and the tax code can be adjusted.

The letter in the tax code

The letter in the tax code, which shows which tax allowances you are receiving, the table below shows the meaning behind each letter:

Letter What it means
L You’re entitled to the standard tax-free Personal Allowance
M Marriage Allowance: you’ve received a transfer of 10% of your partner’s Personal Allowance
N Marriage Allowance: you’ve transferred 10% of your Personal Allowance to your partner
S Your income or pension is taxed using the rates in Scotland.
T Your tax code includes other calculations to work out your Personal Allowance, for example it’s been reduced because your estimated annual income is more than £100,000
0T Your Personal Allowance has been used up, or you’ve started a new job and your employer doesn’t have the details they need to give you a tax code
BR All your income from this job or pension is taxed at the basic rate (usually used if you’ve got more than one job or pension)
D0 All your income from this job or pension is taxed at the higher rate (usually used if you’ve got more than one job or pension)
D1 All your income from this job or pension is taxed at the additional rate (usually used if you’ve got more than one job or pension)
NT You’re not paying any tax on this income


Most PAYE codes are made up of a number followed by a letter:

  • the letter relates to the type of allowance(s) you are getting (see below)
  • the number shows the amount of income you have as allowances which may be set against tax (see below).

The amount of income tax you pay depends on How much you earn over your Personal Allowance and also How much of your income falls within each tax band.

HMRC has set amount called personnel allowance which is the amount of income you are entitled to receive free of tax each tax year. The standard personal allowance for the current 2016/17 tax year (this is the period from 6 April 2016 until 5 April 2017) is £11,000.

Your Personal Allowance may be higher if you claim Marriage Allowance or Blind Person’s Allowance or smaller if your income exceeds £100,000.

If your circumstances change during the tax year, for example, you have a new source of income, you must inform HMRC in writing as soon as possible.

It is important to check that the tax codes HMRC have issued are being operated by your employer of pension provider. It can become more confusing in retirement as pensioners often have multiple sources of income including the taxable state pension that is paid gross. It is worth checking that the tax codes issued to you actually take the correct amount of tax. You can contact HMRC, Tax Help for Older People or if you have a ‘personal tax account’ you can view your tax codes there. To access your ‘personal tax account’ go to tax-account and follow the prompts. Using Government Gateway is the easiest way to access your account but if you want someone else to manage your affair via ‘Trusted Helper’ you need to follow the ‘Verify’ route.