What is the difference between paye and income tax

The personal allowance is the amount you're able to earn tax-free each year. The rate you pay will be determined by your income. If you live in Scotland, read our guide on Scottish income tax for more information. PAYE is generally split into equal payments over the year. To work out how much tax you'll pay in , use our income tax calculator.

PAYE is also used to collect tax from those who receive pension income. The money you receive is paid net, meaning after tax has been deducted.

Tax you owe will be collected by your pension provider normally a pension scheme or annuity firm and forwarded to HMRC. Your pension provider will also deduct any tax you owe on your state pension. If you get payments from more than one provider - for example, a workplace pension and a private pension - HMRC will ask just one to take out the tax for your state pension payments. Find out more: state pension explained - find out how the State Pension works and how much you might receive.

In some circumstances, however, you can pay tax through PAYE instead — which means your tax is paid automatically and there's no danger of missing a deadline.

We explain everything you need to know in our guide to income tax for the self-employed. At the end of each tax year 5 April , you will receive a statement, called a P60 , from your employer or pension provider showing the gross total amount of money you've been paid, what tax has been deducted and how much net income you have received after this.

Where you have more than one employer, or more than one pension provider, each one should send you a separate P60 End of Year Certificate. Check all P60s you receive to make sure you've paid the correct amount. This is signified by tax code L. National Insurance is deducted each pay period if your earnings are over a certain amount. Although some payments, such as pension contributions, qualify for income tax relief, you will still need to make National Insurance payments.

Reimbursed expenses that are free of income tax are not automatically free of National Insurance. The general rule is that if the reimbursement is a distinct payment specifically aimed at reimbursing, or making a contribution towards, expenses that you have actually incurred, then the payment should be National-Insurance-free.

However, some expenses are always National-Insurance-free. This includes mileage allowance up to HMRC-approved rates if you use your own car for work, and operational and mess allowances and council tax relief payments for members of the Armed Forces. Find out more : National Insurance explained - more on how this tax works.

This may include contributions to your employer's pension scheme including any voluntary contributions or contributions that will be passed to a personal pension provider.

These contributions are taken out of your pay 'at source', and therefore you do not pay tax on them. This threshold tends to increase at the start of every new tax year. Other deductions could include subscriptions to a trade union, or deductions under a court order to repay debts or pay child maintenance.

Though you pay income tax on most of your earnings including overtime, bonuses, commission, tips and holiday pay , some payments from your employer are tax-free. These do not count towards your taxable income, and do not have to be declared if you are sent a tax return.

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If you are an employee, you normally pay tax through PAYE. PAYE ensures that the yearly amounts you have to pay are collected evenly on each pay day over the course of the tax year. You may be entitled to tax credits and to tax reliefs and exemptions to reduce the amount of tax you pay. If you are a PAYE customer, please see how to review your tax for any of the four previous tax years.

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HMRC has the power to charge interest on the tax and National Insurance not paid to the Collector on time during the tax year and at the tax year end. Large employers employers with or more employees are required to make their payments to HMRC electronically.

Late payment penalties apply where PAYE is paid late on more than one occasion during the tax year. The late payment penalty regime applies to all employers, including large employers who are required to pay PAYE electronically.

HMRC do allow a three-day period of grace before levying a penalty. However, where employers frequently pay with the grace period, a penalty may be charged.

The penalty is a percentage of the PAYE paid late. The percentage that is charged depends on the number of time that PAYE has been paid late in the tax year. The first time that an employer fails to pay PAYE on time in the tax year is not counted as a default.

The penalty rate increases with the number of defaults in the tax year, as follows:. A further penalty of five per cent is charged in respect of any PAYE that is outstanding after six months and again after 12 months. Penalties are not charged if HMRC accepts that the employer had a reasonable excuse for making the payment late. The penalty is charged in-year on a quarterly basis.

Interest is charged on PAYE paid late. Interest is charged in-year once the outstanding payment has been made. Income that a person receives from an office or employment is charged to tax under the Income Tax Earnings and Pensions Act as employment income.

For the purposes of the charge to tax on employment income, an employment includes any employment under a contract of service, a contract of apprenticeship or any employment in the service of the Crown. The rules apply equally to offices and office-holders as they do to employment and employees. The PAYE system is a collection mechanism that applies to certain types of employment income. The scheme works by requiring employers to deduct tax when they make a payment to an employee and to pay the tax deducted over to HMRC.

Income tax under PAYE must be deducted from the employment income that an employee receives from holding an office or being in employment. PAYE operates on a cumulative basis which takes account of earnings and tax deducted earlier in the same tax year. These deductions include contributions made, by the employee, into a registered pension scheme, and charitable donations under Give As You Earn.

The tax code reflects the personal allowances available to the employee, less deductions from those allowances, for example to collect tax on benefits in kind. The tax code is a combination of numbers and letters. The number is used to work out the tax due on the income or pension and the letter indicates how the code should be adjusted for any changes announced in the Budget.

The number is the allowances due to the individual, less deductions from those allowances, less the last digit. The suffix letter does not affect the amount of tax paid. The letters that are currently used are:. T — tax code where there are items in the code that HMRC wishes to review or other codes are not appropriate. N — tax code where person has transferred the marriage allowance to their spouse or civil partner.

The personal allowance is set each year. This equates to a tax code of L where a person receives only their personal allowance and has no adjustment to their code. The tax code is fundamental to the operation of PAYE and it is vital that employers are using the correct code for an employee as updated for Budget changes as appropriate. This means that the employee pays tax based only on the earnings of the tax week or month.