PAYE

For other uses see Paye (disambiguation)

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PAYE (pay as you earn) is a withholding tax in the United Kingdom, Ireland, and certain other countries. It is an amount collected by employers on behalf of the government from employees as a provisional payment of tax on the employee's income.

Application

The amount withheld is determined partly by the employee's expected tax allowances, exemptions and reliefs, and partly by tax tables that determine the amount of tax to be deducted for the salary or wage paid to the employee.

Wages includes sick pay and maternity pay. This means that you pay tax over the whole year, each time you are paid. Your employer is responsible for sending the tax on to HM Revenue and Customs (HMRC).

If you pay tax on your wages or occupational pension under PAYE, the PAYE system can also be used to collect the income tax of any other taxable income you have. For example, if you pay tax under PAYE on an occupational pension, the tax due on your state retirement pension is collected through PAYE by deducting tax from your occupational pension.

Individual countries may apply the principle of PAYE differently to suit their own policy objectives. PAYE as a system is also used to collect national insurance and or medical insurance contributions plus other social security contributions.

The tax collected during the year may be enough to discharge the taxpayer's liability for tax, 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.

PAYE is, in effect, a withholding tax administered separately by the tax authority. As the tax collector is a fact of life, all forms of income attract their attention, and administrative arrangements are put in place to allow for the smooth payment and collection of taxes.

History

The UK introduced PAYE in 1944 ^[1], following trials in 1940-1 ^[2]. As with many of the United Kingdom’s institutional arrangements, the way in which the state collects income tax through PAYE owes much of its form and structure to the peculiarities of the era in which it was devised. The financial strain that the Second World War placed upon the country meant that the Treasury needed to collect more tax from many more people. This posed significant challenges to the government, and to the many workers and employers who had previously never come into contact with the tax system.

Other countries

The system is known by different names in different countries. It is known as PAYE in the Republic of Ireland. It also may be combined with other tax collection processes. Australia, for example, supplemented its PAYE system called PAYG^[3] which also administers the collection of VAT and business income.

Other forms of withholding

Canada and the USA also use wage-withholding systems with some similarities to the PAYE system. However, because the employee, not the taxing authority, determines the expected tax exemptions (the equivalent of the PAYE tax code), the Canadian and U.S. wage withholding systems do not remove the need for the employee to file a tax return at the end of the year.

Notes and references

External links

• http://www.hmrc.gov.uk/employers/tma-paying-someone-for-the-first-time.shtml
• http://www.hmrc.gov.uk/payetaxpayers/
• http://www.freelancesupermarket.com/featured-articles/what-is-paye.aspx
• http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml
• http://www.adviceguide.org.uk/index/life/tax/the_pay_as_you_earn_paye_system.htm
• http://www.revenue.ie/en/personal/paye-employee.html