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Understanding PAYE

Understanding PAYE: how your employer works out deductions

What PAYE does, why your tax code matters, and why two months of the same salary can differ.

Last reviewed 22 August 2026

Illustrated tax reference with charts, documents and a calculator

What PAYE actually is

Pay As You Earn (PAYE) is the system employers use to deduct income tax and National Insurance from wages before they reach your bank account. Your employer sends those deductions to HMRC on your behalf and reports each payment through Real Time Information.

Because deductions happen at source, most employees never file a tax return. That also means the accuracy of your pay depends on the information HMRC holds about you.

Why your tax code drives the result

Your tax code tells your employer how much tax-free pay to give you across the year. The common code represents the standard personal allowance spread evenly across your pay periods.

Codes change for many reasons: a company benefit, an underpayment from an earlier year, a second job, or an estimate HMRC has made about untaxed income. Our calculators assume a standard code with no adjustments, so a different code is one of the most frequent reasons a payslip does not match an estimate.

  • A cumulative code smooths your allowance across the year, so a mid-year pay change ripples into later months.
  • A code ending in W1 or M1 taxes each period in isolation, which can look higher than expected.
  • A K code means deductions exceed your allowance, usually because of taxable benefits.

Using the calculators alongside your payslip

Compare your annual figures rather than a single month. Enter your gross annual salary, your pension percentage and your student loan plan, then compare the annual estimate with the year-to-date totals on your latest payslip.

If the two are close but not identical, the difference is usually timing, a tax code adjustment or a benefit in kind rather than an arithmetic error. Your actual position depends on your full circumstances, and you may wish to seek professional advice.

Calculators for this topic

This guide explains how the rules generally work. It is not tax advice, and your own position depends on your full circumstances — you may wish to seek professional advice.