PAYE

Paye is also an archaic term for caulking.

PAYE (or pay-as-you-earn) is a payroll deduction system in which tax is deducted from a person's income when paid by the employer. The amount withheld is determined by a tax code which applies the taxpayer's individual tax liabilities. The PAYE system is also used to collect national insurance contributions.

PAYE is intended to collect the correct amount of tax on an employee's pay automatically, so no tax return and no further payment of tax is required. However, where necessary, the taxpayer and government reconcile the difference between the amount withheld and the amount owed by the filing of a tax return (for example, where the employee has other income, such as interest or dividends, which is not fully taxed at source).

PAYE allows most income tax payable by the large number of employees to be collected readily and easily from a smaller number of employers, with a minimal compliance obligation for the employee. If PAYE did not exist, each individual taxpayer would need to make their own tax payments. In the past, this meant that tax has gone unpaid or paid late because the taxpayer has spent the money instead of saving it for their tax payments. The cost of administering a large number of relatively small payments from individuals compared to much fewer larger ones from employers means that PAYE is administratively attractive. However, employers are subject to a compliance cost as they have to administer the PAYE deductions on behalf of the government, and employers are also potentially liable for penalties and interest if the amount paid in the United Kingdom to HM Revenue & Customs (formerly the Inland Revenue) is too small.

The PAYE system was introduced in the UK in 1944, following trials in 1940-1 and is also used in the Republic of Ireland and New Zealand.

In 2000, Australia replaced its PAYE system with a PAYG (Pay-As-You-Go) alternative.

While not officially called "pay as you earn" the tax systems of both Canada and the USA are similar. Taxes on pay are withheld by an employer and sent directly to the government on the earner's behalf. However, due to various exemptions and deductions which exist in the tax systems of those countries, an employer can only roughly estimate an individual's total tax liability. Taxpayers are required to file an annual tax return to reconcile their total tax due. The difference will result in either a tax refund being issued or a requirement to pay additional tax.