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A pay-as-you-earn tax (PAYE), or pay-as-you-go (PAYG) in Australia, is a withholding of taxes on income payments to employees. Amounts withheld are treated as advance payments of
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable 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.


United Kingdom


Origins

Devised by Sir Paul Chambers, PAYE was introduced into the UK in 1944, following trials in 1940–1941. 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 World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the World War II by country, vast majority of the world's countries—including all of the great power ...
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.


Nature

PAYE is applied to sick pay, maternity pay,
directors'
directors'
fees and pensions (but not the
state pension A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
, although it remains taxable), as well as wages and salaries. Each person has a tax code which is used to reflect any allowances, along with other taxable income (including the state pension). This means that the PAYE system typically results in the correct amount of tax being paid on all the taxable income of a taxpayer, making a
tax return A tax return is the completion of documentation that calculates an entity or individual's income earned and the amount of taxes to be paid to the government or government organizations or, potentially, back to the taxpayer. Taxation is one of ...
unnecessary. However, if the taxpayer's affairs are complicated, a tax return may be required to determine the amount of tax payable or refundable.


Reporting

The employer is responsible for sending the Income Tax on to HMRC each month, along with various other employment taxes. The amounts deducted from each payment to individual employees must be reported using an electronic submission on or before the day payment is made.


Ireland

PAYE in Ireland includes deduction of income tax and PRSI ( Pay Related Social Insurance) by employers from payments to employees. The amount is determined by employers based on a Certificate of Tax Credits and Standard Rate (Certificate) provided by Ireland Revenue (Revenue). PAYE applies to earnings of all kinds arising from your employment, including bonuses, overtime and non-cash payments known as "benefits in kind" such as the use of a company car.


Forms and reporting

Employees must apply to Revenue for the certificate by submittin
Form 12A
to Revenue. A certificate is issued at the beginning of each tax year based on the employee's personal circumstances. At the end of each tax year, the employer must give the employee a certificate of Pay, Tax and PRSI deducted during the year, Form P60. A Form P45 is a certificate given by an employer to an employee on cessation of employment. This form certifies the employee's pay, tax and PRSI contributions from the start of the tax year to date of cessation and also certifies that the deductions have been made in accordance with the instructions given by Revenue. If the PAYE is not the same as tax that would be due for the year, the employee must fil
Form 12
an annual tax return.


New Zealand

PAYE is deducted by employers from employees' salary or wages in New Zealand, and paid to the Inland Revenue Department (IRD) on their behalf. It includes income tax and ACC earners' levy. PAYE is calculated by employers based on tax codes provided by the employee and tables provided by the IRD. Employees may calculate their expected tax and tax code using th
PAYE calculator


Forms and reporting

Employees must provide their employer with a complete

form, advising their employer of their IRD number (which is one's identification number with the IRD) and the appropriate tax code for which to deduct in tax, and if required, student loan repayments. If an employer does not receive a correctly completed IR330, the employer may deduct tax at the "no-notification rate" of 45%. Employers use either the IR340 (weekly/fortnightly) or IR341 (four-weekly/monthly) PAYE deduction tables to determine the appropriate amounts to deduct from an employee's wages. Every month, an employer must file a complet

with the IRD, stating the income and deductions of each employee. Tax withheld must be paid to the IRD monthly or semi-monthly, accompanied (or sent separately in the case of electronic payment) with a completed IR345 Employer deductions form.


Australia

The
Australian Taxation Office The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system, superannuat ...
(ATO) administers a pay-as-you-go tax (PAYG) withholding system. Introduced in 1999, it merged 11 previous payment and reporting systems, one of which was a "PAYE" system for employee income, from which the name "PAYG" distinguishes. Employers must calculate the amount of income tax to withhold based on ATO tables, based on employee declarations. These arrangements cover payments from employment as well as under the Prescribed Payments system and the Reportable Payments system. The PAYG system involves regular payments made by employers and other payers, for example, superannuation funds. It is used to collect by instalments
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
, HELP repayments, Medicare and other payments. PAYG amounts to be withheld are determined based on the
Australian Taxation Office The Australian Taxation Office (ATO) is an Australian statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system, superannuat ...
(ATO) PAYG schedules. Discrepancies and deduction amounts are declared in the annual income tax return and will be part of the refund that follows after annual assessment or reduce the tax debt that may be payable after assessment. For an employee's primary job, the withholding tax rate is lower because of the existence of a tax-free threshold in Australia. All other work has tax withheld based on a rate that excludes the tax-free threshold.


PAYG summaries

Each employee who receives PAYG-type payments during a financial year would receive a PAYG payment summary from their employer at the end of the financial year - commonly known as the Group Certificate. The PAYG payment summary will include: * the employee's details including the Tax File Number (TFN) * the gross income earned by the employee from that payer * the total PAYG amount withheld by the payer * the payer's
Australian Business Number The Australian Business Number (ABN) is a unique 11-digit identifier issued by the Australian Business Register (ABR) which is operated by the Australian Taxation Office (ATO). The ABN was introduced on 1 July 2000 by John Howard's Liberal Party ...
or withholding payer number (WPN). The information on the PAYG payment summary is needed to enable the employee to complete his or her income tax return. The payer must send to the ATO a copy of the PAYG payment summaries as well as an annual PAYG summary. This may be sent to the ATO electronically using
Standard Business Reporting Standard Business Reporting is a group of international programs instigated by a number of governments A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, en ...
enabled software, or it may be sent as a hard copy by mail. The total of the wages paid reported on the PAYG summary and the total amount withheld must agree with the totals as reported by the payer to the ATO on the Business Activity Statements (BASs) for the year. The ATO will use the information on the PAYG payment summary to match with the employee, using the employee's TFN.


Barbados

The PAYE tax system was introduced in Barbados in 1957 which allowed employees to have their income tax be paid on the behalf of their employers by deducting the amount from their wage/salary. Every employer who has employees earning more than $481 per week or $2,083 per month is required to register as an employer with the Barbados Revenue Authority (BRA) in either 12 month or 52 weekly installments.


Forms and reporting

PAYE can be calculated via a provide
PAYE Tax Calculator form
on the BRA website. Employers must receive the employees' 13 digit Tax Identification Number (TIN) and register them via a provide
A47: 001 Employee Declaration Form
along with a A47.004 PAYE Tax Deduction Remittance Form where after they must pay the employees' taxes to the Revenue Commissioner on or before the 15th of the month following the month in which it was deducted. There is also a provided
Tax Tables Booklet
that assists employers with instructions on how to correctly calculate and pay an employee's income tax.


Similar systems

Several other countries operate systems similar to PAYE that may be referred to as withholding tax or deduction of tax at source. See the articles listed below.


Canada

Canada requires
tax deduction at source Tax deduction at source (TDS) in India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and depen ...
on payments of compensation by employers. The deduction is required for federal and provincial income taxes,
Canada Pension Plan The Canada Pension Plan (CPP; french: Régime de pensions du Canada) is a contributory, earnings-related social insurance program. It forms one of the two major components of Canada's public retirement income system, the other component being Old ...
contributions, and Employment Insurance.


France

Initially set to start in 2018,
France France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...

France
will introduce a pay-as-you-earn scheme for the collection of its state
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
(''impôt sur le revenu'') in January 2019. To accommodate the progressivity of the French tax system, which considers the total income and composition of the
household A household consists of two or more persons who live in the same dwelling. It may be of a single family or another type of person group. The household is the basic unit of analysis in many social, microeconomic and government models, and is impo ...

household
to set the tax rate of individuals, while preserving the
privacy Privacy (, ) is the ability of an individual or group to seclude themselves or information about themselves, and thereby express themselves selectively. The domain of privacy partially overlaps with security, which can include the concepts of a ...

privacy
of employees to their employers, the administration only transmits to companies the individual tax rate to retain on their employees' paychecks, along with other payroll withholding, such as
social security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet Basic needs, basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refe ...
contributions.


Morocco

Employers are required to withhold income tax on salary paid to employees. The tax must be paid to the government during the month following the withholding.


United States

Withholding of income, Social Security and Medicare taxes is required in the United States. The plan was developed by Beardsley Ruml,
Bernard Baruch Bernard Mannes Baruch (August 19, 1870 – June 20, 1965) was an American financier and wikt:statesman, statesman. After amassing a fortune on the New York Stock Exchange, he impressed President Woodrow Wilson by managing the nation's economic m ...
, and
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on Consumption (economics), consumption analysis, Money supply, ...

Milton Friedman
in 1942. The government forgave taxes due March 15, 1942, for tax year 1941, and started withholding from paychecks. Income tax withholding applies to federal and state income taxes. In addition, certain states impose other levies required to be withheld. In the United States, the term "pay-as-you-earn" and PAYE typically refer to
Income-based repayment Income-based repayment or income-driven repayment (IDR) is a student loan Repayment plan, repayment program in the United States that regulates the amount that one needs to pay each month based on one's current income and family size. The phrase ...
of loans, not taxation. However, an IRS article published March 29, 2022 updates and reviews the policy as pay-as-you-go, or else you may be penalized for not paying estimated taxes if you owe more than $1,000 after taxes are withheld.


Notes and references


External links


PAYE for employers: the basics, on HMRC website (UK)HMRC website: PAYE taxpayers (UK)Australian Taxation Office website on PAYG withholdingNew Zealand: PAYE Calculatior (NZL)Tax Personal_taxes
Withholding_taxes.html" ;"title="Personal taxes">Tax Personal taxes
Withholding taxes">Personal taxes">Tax Personal taxes
Withholding taxes