How do I work out my tax?
If you are an employee, your employer takes income tax and National Insurance contributions (NIC) off your pay before paying you. Your employer sends the tax and NIC to HM Revenue & Customs (HMRC). This system is called Pay As You Earn (PAYE). You need to be able to work out your tax, so that you can check your employer is deducting the right amount of tax from your pay.
What is PAYE?
The Pay As You Earn (PAYE) system is a method of paying income tax on employment income. It is the backbone of employee taxation and it is a very important factor when working out your overall tax position, so you need to be able to understand it.
PAYE spreads your tax and NIC over the tax year, rather than paying in one lump sum. Your employer collects tax from your wages using a code number, provided by HMRC direct to your employer while a copy of the code number and how it has been calculated is sent to you.
Each pay day your employer should give you a payslip setting out your pay and tax. At the end of the tax year, you should get a form P60 which sets out the total amounts paid to you and deducted from you for the previous tax year (your employer MUST give you this by 31 May following the end of the tax year).
The tax collected under PAYE is an estimate, and is not necessarily the exact amount you are required to pay. However, for many employees there will be little or no difference between the amount of tax deducted under PAYE and the amount of tax actually due on their employment income. See the example of Paul below.
For further information on the PAYE system, see our page How is my tax collected?.
How do I work out my tax?
Remember that the tax year runs from 6 April one year to 5 April the next, for example, the tax year 2023/24 runs from 6 April 2023 to 5 April 2024.
Working out your tax position is basically a four stage process, which we set out in the tax basics section. In stages one and two, you have to work out your taxable income and any allowances or deductions you are entitled to.
In this employed section of our website, we provide further information on:
that relate specifically to employees.
For most people in employment, their only earnings income will be their taxable employment income, including non-cash benefits-in-kind. For most people in employment, their only allowances will be the personal allowance.
To work out your tax (stages three and four), you also need to understand at what rate your income is taxed (see below) and how much tax you pay through PAYE, so you need to be able to check your coding notice and understand your payslip.
You can read about tax rates on our page What tax rates apply to me?
You can read about how tax is collected through PAYE on the How is my tax collected? page.
You have to pay tax on any other (non-employment related) taxable income that you have in the tax year too. So, if you have any other taxable income, you need to include this in your calculations.
Where can I find more help and information?
HMRC have online tools to help you check the tax you are paying in the current year and have paid in past tax years. These can be found on GOV.UK. In order to access some of these services you need to have a Personal Tax account (and thus, a Government Gateway account).
Paul earns £20,000 per year, paid monthly (so £1,667 per month). His tax code is 1257L. This is Paul’s only income.
Under this tax code, Paul’s employer knows that Paul will be entitled to £12,570 of tax-free income a year or £1,048 per month. Each month, tax is calculated on £619 at 20% (that is, his £1,667 salary less £1,048). This gives £123.80 per month PAYE tax, or £1,485.60 at the end of the year.
At the end of the year when Paul wants to work out his tax, he can see the PAYE deducted from him is roughly correct:
- Salary £20,000
- Personal Allowance (£12,570)
- Total £7,430
- @20% £1,486
- PAYE deducted £1,485.60
Paul’s income tax position is balanced – there is no more tax to pay and nothing due back to him.