How is my tax collected?

Updated on 3 November 2019

Employment

On this page we look at how tax is collected from employment income, using Pay As You Earn (PAYE). This page only deals with UK-source employment income.

If you want information on how tax is collected from other types of taxable income, go to the tax basics section.

For more information on how foreign income is taxed, go to our migrants section.

How is my tax collected?

Tax can generally be collected in two ways – either taken from you before you get the rest of the money, or you pay it direct to HM Revenue & Customs (HMRC). Sometimes it is a combination of the two – you might have some tax taken from the money before you get it and then have to pay the difference, or claim a refund, depending on your own tax situation.

If the person paying your income deducts tax from your income before paying it to you, it is often known as having tax ‘deducted at source’.

This means you only receive the ‘net’ amount of income after tax, rather than the ‘gross’ amount.

When you are working out how much tax you are due to pay, it is important to note that you have to include the gross amount of your income, including any tax that has been deducted from the income before you received it, rather than just the net amount.

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How is tax collected from my wages and salary?

HMRC require employers to deduct tax from your wages or salary under the Pay As You Earn (PAYE) system.

This applies to you whether you work for an employer full-time or part-time, permanently or temporarily, and also if you are employed on a casual basis.

Under the PAYE system, HMRC use a system of codes to tell employers how much tax to deduct from your wages or salary. The aim is to collect the correct amount of tax each time you are paid and to spread your tax allowances evenly throughout the year. This means that you get the benefit of having your tax collected evenly throughout the year, rather than having to pay it in one big lump sum. Hopefully, at the end of the year you will have paid approximately the correct amount of tax. You do still need to check your own taxes, however, as the PAYE deduction will not always be right.

In addition to income tax being deducted under PAYE, National Insurance contributions (NIC) are also collected in this way. You can read more about this on our page What National Insurance do I pay as an employee?.

Read our separate spage on checking your coding notice to make sure you understand how you are being taxed. That page also tells you what to do if you do not understand your coding notice or think it is wrong.

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How is tax collected on benefits I get from my employer?

If your employer provides you with taxable benefits, you have to pay tax on them. However, sometimes, because they are non-cash, they are not easily valued and so sometimes they are not taxed through the payroll at the time they are provided, unlike a salary or bonus for example.

From 6 April 2016 there are two ways of collecting the tax due on these benefits – by using a form P11D or by payrolling.

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How do I pay tax on benefits using the P11D method?

This is the method that was in use before 6 April 2016 and continues unless your employer opts to use the ‘payrolling’ method (see below). If you receive taxable benefits, your employer gives you a form P11D by 6 July following the end of the tax year, for example, by 6 July 2020 for the tax year 2019/20. This summarises the value of the benefits that you have been provided with. The amount on the form P11D represents additional employment income and is taxable.

HMRC may try to collect the tax due on your taxable benefits through your tax code. If so, HMRC will amend your tax code to include the value of the taxable benefits. This adjustment for a taxable benefit will appear as a deduction from your tax allowances for the tax year and will mean that more tax is collected than would be the case on your wages or salary alone.

To understand more about this see our page on checking your coding notice.

When you are first provided with a benefit, there can be a time lag while HMRC process the relevant information. For example, HMRC are unlikely to be able to deal with benefits first provided to you in 2019/20 in your 2019/20 tax code unless you contact HMRC and let them know about the benefit. You are therefore likely to receive a P800 calculation showing an underpayment of tax for 2019/20, which HMRC will try to collect by adjusting your tax code during a later year.

Thereafter, HMRC try to include estimated amounts of benefit income in current year codes, so that they can try and collect the tax during the tax year in which you receive the benefit. In some instances where you receive benefits, you may find that your tax code is adjusted for a prior year underpayment and a current year estimated liability on benefits all at the same time.

It is therefore very important to check your coding notice to ensure that any benefits are being included properly and that any tax underpaid from an earlier year due to benefits is correctly shown.

Example

Dean is entitled to the basic personal allowance of £12,500 for 2019/20. He has the use of a company car throughout 2019/20, and the estimated taxable car benefit is £3,110. There are no other adjustments required to Dean’s PAYE code. His 2019/20 code is made up as follows:

Total allowances and reliefs – personal allowance £12,500
Total deductions – value of taxable car benefit -£3,110
Total tax free income allowed for 2019/20 £9,390


The code of 939L tells Dean’s employer that Dean can only receive £9,390 of tax free income in 2019/20. Note that if Dean had been a Scottish taxpayer his tax code would have had a prefix of ‘S’. If Dean had been a Welsh taxpayer his code would have had a prefix of ‘C’.

Dean will pay slightly more tax each month on his cash salary than he would have done had his tax code been 1250L – indicating the availability of the basic personal allowance of £12,500 – however at the end of the tax year when a full reconciliation (tax calculation) is performed, hopefully his tax liability on the car benefit will have been settled. 

If Dean did not pay the tax through his PAYE code, he would have to settle the tax liability on the car benefit after the end of the tax year.

Alternatively, HMRC may ask Dean to complete a Self Assessment tax return, and he will have to pay the extra tax due on the benefits through Self Assessment.

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How do I pay tax on benefits using the payrolling method?

Your employer must tell you if this method is being used. Your employer calculates the value of the benefit being provided to you during the whole year and then collects the tax due on that benefit directly through the payroll. Before 1 June following the end of the tax year, so by 1 June 2020 for the tax year 2019/20, your employer must provide you with a statement showing the benefits that have had tax collected on them through the payroll.

Example

Steph is provided with a car by her employer during 2019/20 and the car benefit is expected to be £3,300 for the full tax year. Her employer advises both her and HMRC that they are going to payroll this benefit. Steph’s tax code should not show any restriction for the car benefit. She is entitled to the basic personal allowance and so should expect a tax code of 1250L. Note that if Steph had been a Scottish taxpayer, her tax code would have had a prefix of ‘S’. If she had been a Welsh taxpayer, her tax code would have had a prefix of ‘C’.

Each pay day her employer will add an amount to her salary to collect the tax due on her car benefit throughout the year. Steph is paid monthly so each month her employer will add £275 (£3,300 divided by 12) to the value of her cash salary before calculating the tax she has to pay that month. Note that Steph does not receive £275 per month extra in her pay, but she pays tax as if she had been paid an extra amount. That means that at the end of the tax year Steph will have paid tax on £3,300 in addition to the tax due on her salary and so will have paid the tax due on her car benefit through her payroll. 

Your employer may not payroll all of your benefits so you may also receive a P11D for some of them.

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How is my tax collected if I have more than one job?

If you have two employments, HMRC will generally allocate your personal allowance to your main source – normally the source which pays you the most money. The other source will then have a different PAYE code allocated to it; in most cases this will either be a BR or a D0 code. If it is BR then tax will be deducted at the basic rate of 20%. If it is D0, it means tax will be deducted at the higher rate of 40%. 

You can read more about these tax codes on our checking your coding notice page.

If you live in Scotland and are a Scottish taxpayer, different income tax rates and bands apply to your earned income. There is more information in our pages on Scottish income tax.

If you live in Wales and are a Welsh taxpayer, different income tax rates and bands apply to your earned income. There is more information in our pages on Welsh income tax.

For more information and examples concerning multiple jobs, take a look at the factsheet Having more than one job.

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How is my tax collected if I am employed and self-employed?

It is possible to be both employed and self-employed at the same time.

You pay tax on your employment and self-employment income in different ways. The total tax you pay is based on your total combined income from all sources.

You pay tax on your employment income through PAYE.

You pay tax on your self-employment profits under the Self Assessment system. If you have to complete a Self Assessment tax return because of your self-employment income, you must also include your employment income (and taxes paid) and any other income that you have on your Self Assessment tax return, not just the self-employment income as it is a ‘return’ of all of your taxable income for the year.

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Where can I find more information?

If you want information on how tax is collected from other types of taxable income, go to the tax basics section.

You can find more information on Scottish income tax in our tax basics section. Similarly for Welsh income tax.

You can find more information on your tax code on GOV.UK.

You can find more information on the inclusion of taxable benefits in your tax code on GOV.UK.

GOV.UK also has more information on National Insurance contributions (NIC) on company benefits.

For information on tax if you are both employed and self-employed, go to GOV.UK.

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