What is 'Pay As You Earn (PAYE)'

Pay As You Earn (PAYE) refers either to a system of income tax withholding by employers, or an income-based system for student loan repayments. In the context of taxes, Pay As You Earn requires employers to deduct income tax — and in some cases the employee portion of social insurance benefit taxes — from each paycheck delivered to employees as a form of advance payment on taxes due. In the context of student loans, PAYE is a U.S. federal loan repayment plan in which payment amounts are based on income rather than a fixed amount.

Breaking Down 'Pay As You Earn (PAYE)'

The tax and revenue agencies of many countries employ the Pay As You Earn system in which money is deducted from paychecks by the employer and remitted to the government. Any sum taken in excess of the amount of tax due it repaid to the taxpayer. If there is a shortfall between how much tax was paid and how much was actually due, the taxpayer will have to make up the difference once they file their annual tax return document. The PAYE system was developed in 1944 by Sir Paul Chambers in the United Kingdom. Such a system for collecting and paying taxes may also be referred to as "pay as you go," a term more prevalent in the United States.

Pay As You Earn in Use

The pay as you earn system is a requirement in the United Kingdom for all salary earnings, as well as other forms of compensation, if the earnings are expected to meet the National Insurance Lower Income Level. PAYE is also utilized in Ireland, New Zealand and South Africa, among other countries. Many other counties use similar systems under a different name, such as the Australian Tax Office's (ATO) "Pay As You Go (PAYG)," withholding system, which was adopted in 1999.

Pay As You Earn and Student Loans

Pay As You Earn can be a helpful tool for individuals who have significant federal student loan debt but do not earn enough to meet their minimum payment without causing hardship. PAYE loan repayment is based on how much the borrower earns (an income-driven repayment plan). Eligible federal student loan borrowers can have their monthly debt payment reduced to 10% of their discretionary income. After 20 years, any remaining balance is forgiven. PAYE is one of a number of payment assistance programs: There is also the Revised Pay As You Earn (REPAYE), an Income-Based Repayment Plan (IBR), and an Income-Contingent Repayment Plan (ICR Plan). For more, see the Department of Education's Federal Student Aid repayment plan informational page, which also includes a link on how to apply.

RELATED TERMS
  1. Student Loan Forgiveness

    Under certain circumstances, federally backed student loans — ...
  2. Repayment

    Repayment is the act of paying back money borrowed from a lender ...
  3. Perkins Loan

    A loan program that provides low-interest student loans to undergraduate ...
  4. Stafford Loan

    A Stafford loan is a type of federal, fixed-rate student loan ...
  5. Federal Income Tax

    A federal income tax is levied by the United States Internal ...
  6. Withholding Tax

    A withholding tax is a tax that is withheld from employees' wages ...
Related Articles
  1. Personal Finance

    How Residents and Physicians Can Tackle Student Debt

    Here's how residents and young physicians can tackle their debt load while saving.
  2. Personal Finance

    Save Money With the Right Student Loan Repayment Plan

    Here is some information on two of the most advantageous student loan repayment plans available.
  3. Financial Advisor

    Deal with Your College Debt Using These Steps

    The worst thing to do with college debt is to ignore it. The best way to start tackling it is with a clear roadmap to financial freedom.
  4. Personal Finance

    10 Tips to Topple Student Loan Debt

    How to manage those burdensome payments as you embark on adult life.
  5. Personal Finance

    Beware of Student Loan Repayment Programs

    Paying a reduced amount on your student loans and having them forgiven can be too good to be true.
  6. Personal Finance

    Don’t Fail Student Loan Debt 101

    Don't be a statistic! According to a recent study, six in 10 Millennials don’t know what they owe or what to do with student loans after they graduate.
  7. Personal Finance

    What New Student Loan Repayment Options Mean

    American college graduates are facing an increasing amount of student loan debt. There are new rules for repaying that debt. Here's what you need to know.
  8. Personal Finance

    Avoid These 5 Student Loan Repayment Mistakes

    Avoid these mistakes to lessen the stress of student loans and manage them effectively.
  9. Personal Finance

    Managing Student Loans: 3 Things to Consider

    You can better manage the burden of student loan debt by following these three steps.
  10. Personal Finance

    Use These Tips to Crush Student Loan Debt Fast

    Savvy graduates are paying off their college debt in record time. Here are the strategies that can get you out from under faster.
Hot Definitions
  1. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  2. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  3. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  4. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
  5. Dividend

    A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
  6. Inventory Turnover

    Inventory turnover is a ratio showing how many times a company has sold and replaces inventory over a period.
Trading Center