PAYE (Pay As You Earn)
PAYE (Pay As You Earn) is the UK's payroll tax system. Your employer calculates and deducts income tax and National Insurance contributions from your wages each pay period and sends the deductions directly to HMRC — you receive your net pay. Most UK employees never need to file a tax return under PAYE.
In This Article
- What is PAYE?
- How PAYE works
- What your payslip shows
- Tax codes explained
- Why PAYE matters for visa compliance
- Income tax rates (2025/26)
- National Insurance under PAYE
- Common mistakes to avoid
- Frequently asked questions
- Related terms
What is PAYE?
Pay As You Earn is the mechanism HMRC uses to collect income tax and National Insurance contributions from employed workers in real time — meaning the tax is collected each time you're paid, not at the end of the year. Your employer does the calculation and the deduction; you receive your take-home pay after deductions.
PAYE applies to the vast majority of employees in the UK, including overseas nationals on work visas. It was introduced in 1944 and remains the primary method of income tax collection in the UK.
How PAYE Works
Each time your employer runs payroll:
- Your gross salary is calculated for the pay period (monthly, weekly, etc.)
- Your tax code is applied to determine how much of your income is tax-free
- Income tax is calculated on the taxable portion at the applicable rate(s)
- National Insurance contributions are calculated separately
- Both deductions are sent to HMRC on your behalf
- You receive the net amount
Your employer must submit a Full Payment Submission (FPS) to HMRC on or before each pay date, reporting exactly what you earned and what was deducted. HMRC reconciles this against your tax code and sends corrections if needed.
What Your Payslip Shows
Every PAYE payslip must include:
| Item | What it means |
|---|---|
| Gross pay | Your salary before any deductions |
| Income tax | Amount deducted for income tax this period |
| Employee NI | Your National Insurance contribution |
| Net pay | What you actually receive |
| Tax code | The code used to calculate your tax-free amount |
| NI number | Your National Insurance number |
| Pay period | The dates this payslip covers |
| Employer name | Who is paying you (important for CoS verification) |
Payslips are the primary document used to verify salary compliance during Home Office sponsor compliance visits. The salary on the payslip must match or exceed the salary stated on the worker's Certificate of Sponsorship.
Tax Codes Explained
Your tax code tells your employer how much of your income to treat as tax-free. HMRC issues tax codes — your employer has no discretion over which code to apply.
Common tax codes:
| Code | What it means |
|---|---|
| 1257L | Standard personal allowance (£12,570/year) — most employees |
| BR | All income taxed at basic rate (20%) — used when HMRC doesn't have enough information, or for a second job |
| 0T | No personal allowance — typically used at the start of a new job before HMRC has processed your details |
| W1 or M1 | Emergency code — tax calculated on a weekly or monthly basis rather than cumulatively |
| K codes | You have income that reduces your allowance below zero (rare) |
If you start a new job and are given an emergency tax code (BR, 0T, W1, or M1), you may be overtaxed. Tell your employer to chase HMRC for your correct code, or contact HMRC directly via the GOV.UK income tax service.
Why PAYE Matters for Visa Compliance
For sponsored workers and their employers, PAYE payslips are load-bearing documents.
For workers: Your payslips prove you were paid at the correct salary throughout your visa. If you apply to extend your visa or for ILR, you may be asked to provide payslips covering your entire visa period. Keep every one.
For employers: During a sponsor compliance visit, inspectors will ask to see payroll records for sponsored workers. The salary on each payslip must match the salary recorded on the Certificate of Sponsorship. Any shortfall — even temporary — is treated as a compliance breach.
Specific requirements:
- Salary must be paid in sterling (GBP) — not in a foreign currency
- Salary must be paid to the worker's own account (not to a third party)
- Deductions that reduce take-home pay below the CoS salary level can create compliance issues — only lawful deductions (tax, NI, pension) are acceptable without UKVI approval
Income Tax Rates (2025/26)
| Band | Income | Rate |
|---|---|---|
| Personal allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 – £50,270 | 20% |
| Higher rate | £50,271 – £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
Scotland has different rates — Scottish taxpayers pay Scottish income tax rates set by the Scottish Parliament.
National Insurance Under PAYE
National Insurance is separate from income tax but also deducted through PAYE. For 2025/26, employees pay:
- 8% on earnings between £12,570 and £50,270 per year
- 2% on earnings above £50,270
Your employer also pays employer NI at 15% on earnings above £5,000 per year — this is on top of your salary and doesn't appear on your payslip, but it's a real cost that factors into total employment costs (including what sponsors must budget when sponsoring overseas workers).
Common Mistakes to Avoid
- Not checking your tax code at the start of a new job. Emergency codes mean you'll overpay tax until it's corrected.
- Ignoring payslip errors. If the salary on your payslip is lower than your CoS salary, flag it to payroll immediately — it's a visa compliance issue as well as a payment error.
- Not keeping payslips. Store them (digitally or physically) for the entire duration of your visa plus at least two years after. You will need them for ILR applications.
- Working additional paid roles without checking visa conditions. Skilled Worker visa holders can do limited supplementary work, but additional PAYE income from a separate employer may trigger compliance questions.
Frequently Asked Questions
Do visa holders pay tax differently under PAYE?
No. Sponsored visa holders pay income tax and National Insurance through PAYE in exactly the same way as any UK worker. There is no special tax rate for overseas nationals. The standard personal allowance (£12,570 for 2025/26) applies to most workers regardless of visa status.
What is a tax code and why does it matter?
Your tax code tells your employer how much income to treat as tax-free before applying income tax. The standard code is 1257L, which corresponds to the £12,570 personal allowance. If you have an emergency tax code (such as BR or W1/M1), you may be paying too much tax — contact HMRC to get it corrected. You can often reclaim overpaid tax via a Self Assessment return.
What if I am paid via an umbrella company?
If you work through an umbrella company, the umbrella company is your legal employer for PAYE purposes — not the end client. They deduct tax and NI and pay you the net amount. For visa compliance, the key question is whether the umbrella arrangement is genuine employment at the correct salary and SOC code. Some umbrella structures have been found to be non-compliant with sponsorship rules — check with your sponsor before accepting an umbrella arrangement.
Do I need to file a Self Assessment tax return as a sponsored worker?
Most PAYE employees do not need to file a Self Assessment tax return. You would need to file one if you have additional income sources (freelance work, rental income, investments over £10,000), if you earn over £100,000, or if HMRC specifically requests it. Doing supplementary work outside your PAYE employment may also raise visa compliance questions.
Related Terms
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