PAYE

A pay-as-you-earn tax (PAYE) or pay-as-you-go (in Australia and elsewhere) is a withholding tax on income payments to employees. Amounts withheld are treated as advance payments of income tax due. They are refundable to the extent they exceed tax as determined on tax returns. PAYE may include withholding the employee portion of insurance contributions or similar social benefit taxes. In most countries, they are determined by employers but subject to government review. PAYE is deducted from each paycheck by the employer and must be remitted promptly to the government. Most countries refer to income tax withholding by other terms, including pay-as-you-go tax.

PAYE is required in the United Kingdom on all payments of salary or other compensation, although payments aren't made if the compensation is not expected to reach National Insurance Lower Income Level (£10,000 per year for 2014-2015). The amount of PAYE includes tax allowances, exemptions and reliefs for the full tax year, and also partly by the employee's expected other income. Published tables apply the tax code to determine the amount of tax to be deducted from the salary or wage paid to the employee. The employer is responsible for sending the tax on to HMRC each month.

PAYE is applied to sick pay, maternity pay, directors' fees and pensions (but not the state pension), as well as wages and salaries. Because the tax code reflects other income (including the state pension), the PAYE system typically results in the correct amount of tax being paid on all the income of a taxpayer, making a tax return redundant. However, if the taxpayer's affairs are complicated, a tax return may be required to determine the amount of tax payable or refundable. UK employees can calculate their expected tax and tax code using a PAYE salary calculator.

The forms and reporting rules have changed significantly as a result of the shift to Real Time Information. It is no longer necessary to use forms P14, P46, and P35, and form P45 is now for employees' own records rather than for HMRC's use.

...
Wikipedia