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Taxation (UK) · Income from employment

PAYE, Tax Codes and Payroll Giving for ACCA TX-UK

Updated 11 October 2026 · Fact-checked

PAYE is the system where an employer deducts income tax and employee NIC from pay and sends it to HMRC. A tax code tells the employer how much tax-free pay to give. Real time information reports each payment on or before payday. Payroll giving is deducted before tax, so relief comes at your marginal rate.

Understand Pay As You Earn and Payroll Giving

PAYE (Pay As You Earn) makes the employer collect tax from employment income as it is paid. The employer deducts income tax and employee Class 1 NIC, then pays them to HMRC along with the employer's own Class 1 NIC. You, the employee, do not wait until the year end to pay.

The employer works out how much tax to take using your tax code. The code is a number plus a letter. The number is your tax-free allowances for the year divided by 10, with the last digit dropped. The standard personal allowance of £12,570 gives code 1257L. Deductions, such as the taxable benefits HMRC will not collect any other way, lower the number. Codes usually work on a cumulative basis, so each pay date takes account of pay and tax for the year so far. An emergency code works on a non-cumulative (week 1 or month 1) basis.

Common letter codes you should know: BR (all pay taxed at the basic rate), D0 and D1 (all pay taxed at the higher or additional rate), NT (no tax) and 0T (no allowance). A K code means deductions are more than allowances, so extra income is added to pay before tax is worked out.

Real time information (RTI): the employer sends HMRC a Full Payment Submission on or before each payday. It shows pay, tax and NIC for that payment. Year-end paperwork is also part of the system: a P60 to each employee by 31 May, a P45 when someone leaves, and a P11D by 6 July for benefits not put through payroll. Class 1A NIC on those benefits is due by 22 July (19 July if paid by post).

Payrolling of benefits: with HMRC registration before the tax year starts, an employer can put most taxable benefits through payroll. The tax is collected through PAYE during the year, no P11D is needed for them, and Class 1 NIC applies instead of Class 1A. Living accommodation and employer loans cannot be payrolled.

Payroll giving: the employer deducts a charity donation from gross pay before PAYE. You get tax relief at your marginal rate straight away. There is no NIC saving, because NIC is worked out on pay before the donation.

Tax-efficient share schemes give tax benefits if the conditions are met. The four you meet are SAYE, SIP, CSOP and EMI. Check the figures in your own notes and the exam tax tables, because they are not all in ACCA's rates and allowances.

Key rules to remember

Tax code number
Code number = (Allowances − deductions) ÷ 10, ignoring the last digit, plus letter
Standard personal allowance £12,570 gives 1257L. Benefits taxed through the code reduce the number.
Payroll giving cost
Net cost of gift = Gift × (1 − marginal rate of income tax)
Relief is via PAYE. NIC is not reduced.
Key PAYE dates
P60: 31 May. P11D: 6 July. Class 1A NIC: 22 July (19 July by post)
PAYE paid monthly by the 22nd after the month end if paid electronically (19th by post). RTI is sent on or before payday.
Class 1 NIC rates (ACCA tables)
Employee: nil to £12,570, 8% to £50,270, then 2%. Employer: nil to £5,000, then 15%
Employment allowance is £10,500. Class 1A is 15%.
Share scheme limits to learn
SAYE: £5–£500 a month, 3 or 5 years. SIP: free shares £3,600 a year, partnership £1,800 a year. CSOP: £60,000 of options. EMI: £250,000 of options per employee
These are examinable but not all are in the ACCA tax tables. Learn them and check your study text.

How to solve Pay As You Earn and Payroll Giving questions

Use this order for any PAYE, code or payroll giving question.

  1. 1Identify what is asked: a tax code, a deduction, a deadline, a payroll giving saving or a share scheme.
  2. 2For a code, start with the personal allowance of £12,570. Deduct taxable benefits and other amounts collected through the code.
  3. 3Divide by 10, drop the last digit and add the letter. Round down if needed.
  4. 4For payroll giving, take the gift off gross pay, then work out the tax saved at the marginal rate.
  5. 5Do NIC separately. Payroll giving does not change it. Payrolled benefits attract Class 1 NIC.
  6. 6For share schemes, list the conditions (limits, holding period, type of company) and say what income tax or NIC charge arises or is avoided.
  7. 7State the date or the filing form when asked about compliance: RTI, P60, P45, P11D.
  8. 8Write short, labelled lines. Show workings so partial marks are available in Section C.

Quickest way: Code and gift shortcut

When to use it: Use for objective test questions on codes and payroll giving.

  1. Code: £12,570 less benefit, divide by 10 and drop the last digit, then add L.
  2. Gift: multiply the gift by (1 − marginal rate) to get net cost.
  3. If a question asks about NIC and payroll giving, the answer is no saving.
  4. If the question mentions a benefit that is payrolled, the employer pays Class 1 NIC, not Class 1A, and no P11D is due for it.

Common mistakes in Pay As You Earn and Payroll Giving

  • Getting the tax code number wrong by not dividing by 10 or dropping the last digit.

    Students forget the code is a shorthand of the allowance.

    Fix: Write the allowance in full, divide by 10 and drop the final digit. 12,570 becomes 1257.

  • Saying payroll giving reduces NIC.

    It is deducted from gross pay, so it looks like a salary sacrifice.

    Fix: Payroll giving reduces taxable pay for income tax only. NIC is on pay before the gift.

  • Applying basic-rate relief to a higher-rate taxpayer's gift.

    Students mix up payroll giving with Gift Aid.

    Fix: Payroll giving relief is at the marginal rate through PAYE. A higher-rate taxpayer gets 40% relief.

  • Putting payrolled benefits on a P11D and charging Class 1A.

    Students apply the usual benefit rules.

    Fix: If the benefit is payrolled, there is no P11D for it and Class 1 NIC applies. Living accommodation and loans cannot be payrolled.

  • Mixing up the four share schemes' features.

    The names and limits look alike.

    Fix: Learn each by purpose: SAYE is savings-linked options, SIP is shares bought or given, CSOP is company options, EMI is small company options. Then learn the limits.

Worked examples

Example 1

Anna has the standard personal allowance. Her employer provides a company car with a taxable benefit of £4,000 for the year, and HMRC collects the tax through her code. What is her tax code?

Show the solution
  1. Personal allowance: £12,570.
  2. Less taxable benefit collected through the code: £4,000.
  3. Net allowance: 12,570 − 4,000 = £8,570.
  4. Divide by 10 and drop the last digit: 857.
  5. Add the letter L.

Answer: Tax code 857L.

Example 2

Ben is a higher-rate taxpayer earning £60,000 a year. He gives £100 a month to charity through payroll giving. What is the annual net cost to him, and what is the effect on his employee NIC?

Show the solution
  1. Annual gift: 100 × 12 = £1,200.
  2. His gift is taken from gross pay before PAYE, so his taxable pay falls to £58,800.
  3. Marginal rate: 40%, as he stays in the higher-rate band.
  4. Tax saved: 1,200 × 40% = £480.
  5. Net cost: 1,200 − 480 = £720.
  6. NIC is worked out on pay before the gift, so employee NIC is unchanged.

Answer: Net cost is £720 a year (£60 a month). There is no NIC saving.

Exam tips

  • Know the dates: P60 31 May, P11D 6 July, Class 1A NIC 22 July. Examiners test them in objective questions.
  • Say 'marginal rate' for payroll giving, and say NIC is unchanged.
  • For share schemes, name the scheme, then give the condition that makes it tax-efficient.
  • In Section C, show the code working line by line. A wrong final code can still earn method marks.
  • Use the ACCA tax tables for NIC and tax rates. Do not guess rates.

Practice questions from Income from employment

Pay As You Earn and Payroll Giving: frequently asked questions

How do I work out a PAYE tax code?

Start with the personal allowance of £12,570. Deduct taxable benefits or other amounts to be collected through the code. Divide by 10, drop the last digit and add the letter, usually L.

What is real time information in PAYE?

RTI means the employer reports pay, tax and NIC to HMRC online on or before each payday. HMRC then holds up-to-date records for each employee. It replaced the old year-end return.

Does payroll giving save national insurance?

No. Payroll giving reduces pay for income tax only. NIC is still worked out on pay before the donation.

What is the difference between payrolling and a P11D?

Payrolling puts benefits through the monthly payroll, so tax is collected as you go and no P11D is needed for them. Class 1 NIC applies. If not payrolled, the employer files a P11D and pays Class 1A NIC.