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The Pay As You Earn (PAYE) system is the means by which an employer or pension provider makes certain statutory deductions from an employee’s or pensioner’s income. These include deductions for the employee’s liability to income tax and National insurance contributions (NICs), as well as other Earnings-based deductions such as student loan repayments.

PAYE is effectively HMRC’s method for collecting income tax and NICs from an individual on a regular basis rather than relying on every individual having to complete a tax return in order to notify HMRC of their liability. PAYE is not an exact measurement of an employee’s tax liability; rather it is an estimate of the tax that the employee should pay based on HMRC’s understanding of the income and benefits that they will receive. The tax is calculated based on notices of coding which HMRC supplies to employers and pension providers.

The PAYE system is also the method through which employers are required to make any apprenticeship levy payments. For more detail, see Practice Note: Apprenticeship levy.

This Practice Note describes the circumstances