PAYE: How Tax Comes Off Your Salary and What Your Tax Code Means
Pay As You Earn (PAYE) is the system through which employers and pension providers deduct income tax and National Insurance from pay before it is paid, and send it to HMRC. It is driven by your tax code, which tells the employer how much of your income is tax-free each year.
The standard code for 2026-27 is 1257L: multiply by ten and it is the £12,570 personal allowance, spread across the year so each month's pay gets £1,047.50 tax-free before the 20% band starts. Other letters carry meaning — M and N for marriage allowance transfers, T when HMRC needs to review, K when deductions exceed the allowance and you owe tax on the difference, BR for basic rate on all income (a second job), D0 for 40% on everything.
PAYE is cumulative: each pay run works out the tax due on your earnings so far this tax year and deducts the difference from what has already been taken. That is why a bonus month overtaxes and a later quiet month refunds, and why starting a job mid-year often produces a refund in the first payslip. An emergency code (1257L W1/M1) switches off the cumulation, so if you started without a P45 you may overpay until HMRC updates the code.
The paperwork follows you. A P45 from a leaving employer carries your code and year-to-date figures to the next; a P60 after 5 April summarises the whole year and is what a mortgage lender asks for; a P11D reports benefits in kind such as a company car or private medical insurance, which are usually collected by adjusting your code downward the following year.
PAYE gets things wrong at the edges. Two jobs, a pension plus a salary, a large one-off payment, benefits in kind, or income above £100,000 (where the personal allowance tapers away and the effective rate hits 60%) all produce codes that need checking. Your Personal Tax Account on GOV.UK shows the code in force and lets you correct it, and HMRC issues a P800 calculation when it finds an under- or overpayment after the year ends.
Anyone with untaxed income — self-employment, rental profit, dividends above £500, or a salary over £150,000 — files a self-assessment return on top of PAYE, and higher-rate pension relief and Gift Aid are claimed there too. For everyone else the annual job is simply to read the code on the first payslip of April and make sure it says what it should.
Richify reads your payslips over time, so a changed tax code, a missed pension contribution or an emergency-code overpayment shows up as a jump in deductions the month it happens.
