PAYE (Pay As You Earn) is the system whereby most people in the UK pay their income tax to HM Revenue & Customs (HMRC).
Income tax is deducted before the salary is paid
Employers pay their staff their weekly or monthly salaries after deducting the income tax they owe. Employers then pay the Revenue the total tax they have deducted.
The tax deductions are calculated after taking account of any allowances that employees are due to receive, such as the annual personal allowance.
The Revenue produces tax tables for employers to use to work out how much tax-free pay their employees are entitled to for each pay period, and how much tax should be deducted.
Companies use their employees' PAYE codes to find out what allowances they are due.
All employees have a PAYE code, given to them by their local tax office. It is normally in the form of a number followed by a letter.
The number is created by taking the total allowances and knocking off the last digit. In other words, if the total allowances are £5,035, the number in the code would be 503.
The letter indicates which allowances are included. For example, L represents the basic personal allowance for someone under 65.
Employees can work out their own codes by calculating the allowances they think they are due.
If the employer is using the same code, the tax deducted should be correct because of the tax tables supplied by the Revenue to the employer.
However, employees can calculate for themselves the net monthly or weekly amount they believe the employer should be paying them, by applying the appropriate tax rate to their annual net income after allowances, and dividing the resulting post-tax pay by 12 months or 52 weeks.
Employees should contact their local tax office if they think they are paying too much or too little tax.