What is PAYE and When Do I Need It?

PAYE (Pay As You Earn) is HMRC's system for collecting Income Tax and National Insurance from employment. If you employ staff, you'll usually need to register for PAYE and use it to deduct tax from their wages before you pay them. Understanding when you need to register and what you're required to...

What is PAYE?

PAYE stands for Pay As You Earn. It's the system HM Revenue and Customs (HMRC) uses to collect Income Tax and National Insurance contributions from employees' wages or salaries. As an employer, you operate PAYE as part of your payroll process.

When you run payroll, you calculate how much each employee should be paid, deduct the appropriate tax and National Insurance, and then report these figures to HMRC. You pay your employees their net wages (after deductions), and separately pay the tax and National Insurance you've collected to HMRC.

When you must register for PAYE

You must register for PAYE if any of the following applies to an employee in the current tax year (since 6 April):

They're paid £96 or more a week
They get expenses and company benefits
They're getting a pension from you
They've had another job
They've received Jobseeker's Allowance, Employment and Support Allowance or Incapacity Benefit

If none of these conditions apply to any of your employees, you don't need to register for PAYE. However, you'll still need to keep payroll records.

What you pay your employees

When running payroll, you include all taxable payments to your employees. These include:

Salary or wages
Tips or bonuses
Statutory sick pay
Statutory maternity pay

Your payroll software calculates the total amount due to each employee for the pay period.

What you deduct from their pay

From the payments you make, you need to deduct:

Income Tax (for most employees)
National Insurance contributions (for most employees)
Student loan repayments (if applicable)
Pension contributions (if your employee is enrolled in a workplace pension)

Your payroll software works out these deductions automatically based on each employee's circumstances and tax code.

Your employer National Insurance contributions

In addition to the National Insurance you deduct from your employees' wages, you must also pay employer's National Insurance contributions. This is calculated on each employee's earnings above £96 a week.

This is a separate cost to your business on top of the wages you pay your employees. The amount you owe is worked out by your payroll software.

Reporting to HMRC

If you run payroll yourself, you must report your employees' payments and deductions to HMRC on or before each payday. This is done through what's called a Full Payment Submission (FPS).

You'll also need to send an Employer Payment Summary (EPS) if you need to claim any reduction on what you owe HMRC, for example for statutory pay.

As part of your regular reports, you should tell HMRC:

When a new employee joins
If an employee's circumstances change (for example, they reach State Pension age or become a director)

At the end of the tax year, you have to run annual reports, including telling HMRC about any expenses or benefits you've provided to employees.

Paying HMRC

Based on the reports you submit, you'll be able to view what you owe HMRC through your business tax account. You must pay HMRC the tax and National Insurance you've collected, usually every month.

If you're a small employer and expect to pay less than £1,500 a month, you can arrange to pay quarterly by contacting HMRC's payment enquiry helpline.

How to run payroll

You can operate PAYE by either:

Paying a payroll provider (such as a bureau or accountant) to do it for you
Doing it yourself using payroll software

Even if you pay someone else to run your payroll, you're legally responsible as the employer for completing all PAYE tasks correctly.

Running payroll yourself

If you run payroll yourself, you need to complete certain tasks to set up payroll and pay your employees for the first time:

1. Register as an employer with HMRC and get a login for PAYE Online

2. Choose payroll software to record employee details, calculate pay and deductions, and report to HMRC

3. Collect and keep records

4. Tell HMRC about your employees

5. Record pay, make deductions and report to HMRC on or before the first payday

6. Pay HMRC the tax and National Insurance you owe

You'll also need to complete certain annual reports and tasks to prepare for the next tax year, which starts on 6 April.

Record keeping requirements

You must collect and keep records of:

What you pay your employees and the deductions you make
Reports you make to HMRC
Payments you make to HMRC
Employee leave and sickness absences
Tax code notices
Taxable expenses or benefits
Payroll Giving Scheme documents (if applicable)

Your records must show you've reported accurately, and you need to keep them for 3 years from the end of the tax year they relate to. HMRC may check your records to make sure you're paying the right amount of tax.

If you don't keep full records, HMRC may estimate what you have to pay and charge you a penalty of up to £3,000.

Small business support

You can choose when and how often to pay your employees. The most common frequencies are weekly, fortnightly, or monthly.

HMRC provides various resources to help new employers understand their obligations, including video guides, webinars, and an email update service you can subscribe to for information on payroll topics.

Exemptions to online reporting

Most employers must report payroll information online. However, you may be exempt from reporting payroll online if:

You're prevented from using a computer on religious grounds
You're getting care or support services for yourself or a member of your family
You're unable to send reports electronically because you're disabled, elderly or cannot access the internet

If you believe you're exempt and would prefer to report on paper, HMRC has guidance available on this.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.