Individuals
Pay As You Earn
Most of us, who work for employers, pay our income tax under PAYE (Pay as you earn). PAYE is the means by which HM Revenue and Customs collect tax directly from your employer as the year progresses. The tax year starts on 6 April of one year and ends on 5 April in the next. Under PAYE, your employer takes tax from your weekly or monthly earnings according to set tables and pays it over to HM Revenue and Customs.
You don't pay tax on all your income. Everybody can earn or receive a certain amount in each tax year free of tax. This amount is called a 'personal allowance'. The Chancellor sets the amounts of the allowances each year in the Budget. For example, in the tax year 2006-07 (6 April 2006 to 5 April 2007) the basic personal allowance is £5,035.
How does PAYE work?
Normally under PAYE the total of your allowances is divided by the total number of pay days in the tax year. So if you are paid weekly,
your allowances are divided by 52, and if you are paid monthly, by 12. This gives you your 'tax free pay' for each pay day. For example,
in the tax year 2006/07, if you get the basic allowance of £5,035, you receive £96.83 a week (£5,035/52) tax free if you are paid weekly.
You receive £419.58 a month tax free (£5,035/12) if you are paid monthly.
If you do not get paid for some time, you will not lose your tax free pay for those weeks or months. Usually it builds up until the next
time you get paid. In the same way, if you start work part way through the tax year and have not had any income up to then, you still get all
your tax free pay up to that date. If you do not work for the rest of the tax year you will not have had the full benefit of your tax free pay
and may be due a tax repayment.
The PAYE thresholds (level of earnings at which tax becomes payable) for 2006/07 are: -
- weekly £97.00
- monthly £420.00
These are the same as the earnings thresholds for NICs. The tax rates are: -
- Starting rate 10% to £2,150
- Basic rate 22% from £2,150 to £33,300
- Higher rate 40% over £33,300