What Does Pay As You Earn Mean?

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.

Pay As You Earn Explained

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).