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An introduction to pay as you earn tax

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PAYE or pay as you earn tax is when money is withheld from an employee’s take home wage to cover their tax, national insurance and other salary related contributions.

In simple terms—an employee’s payslip will show their basic pay plus bonuses and will deduct tax and national insurance. As the employer, you pay your employee the net figure and pay the tax and national insurance to HM Revenue & Customs. This can be quarterly or monthly, depending on the amount you need to pay.

Your tax office will assign each employee a tax code, this lets you know which tax band the employee is in, and how much tax you need to deduct from their pay. However, tax is not charged on the full salary.

Everyone gets a personal allowance, this is an amount that any person can earn before they’re charged tax.

For example—if you pay an employee £20,000, and their personal allowance is £8,000, then their taxable pay is £12,000.

Be aware that if you don’t send the correct amount, or if you send it in late—you may have to pay interest. And there are penalties if you submit incorrect information.

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