PAYE is the system you use to take tax from staff pay and pass it on to HMRC. It stands for Pay As You Earn. If you employ people in the UK, you use it. This guide explains what PAYE means for employers and what needs doing each month.
It isn’t complicated, but it does not stop. You register once, then you deduct, report and pay every month. Miss a report and HMRC may start estimating what you owe.
Here’s the full process, from registration through year end.
What is PAYE and how does it work?
PAYE means Pay As You Earn. Every UK employer uses it. You deduct Income Tax and National Insurance from staff wages, send that money to HMRC by the 22nd each month, and report each payment on or before payday.
PAYE is not a separate tax. It’s the way HMRC collects tax and National Insurance from pay before staff receive the money. It spreads each person’s tax bill across the year, so they do not get one big bill in January.
PAYE works cumulatively. Each payroll run looks at pay and tax already recorded in the tax year. If something changes in month three, month four adjusts for it. By 5 April, the totals should be right.
PAYE covers more than basic salary. It applies to wages, bonuses, tips and commission. It also applies to statutory sick pay and statutory maternity pay. Student loan repayments and pension contributions leave through the same run.
Some employers run payroll themselves with software. Others hand the whole job over. Payroll services for small businesses cover the monthly cycle end to end.
Do you have to register for PAYE?
You must register for PAYE if you pay any employee £96 or more a week. You also need to register if a worker gets expenses or company benefits. Do it before your first payday. HMRC then sends your PAYE reference and Accounts Office reference.
Five triggers make registration compulsory. Any one of them is enough:
- you pay them £96 or more a week
- they get expenses or company benefits
- they’re getting a pension
- they’ve had another job
- they’ve had Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit
GOV.UK sets out when you must register as an employer in full.
None of those apply to your staff? You still keep payroll records. Directors count too. A one-person limited company paying a director’s salary needs a PAYE scheme.
Registration takes a few minutes online. The two reference numbers take longer to arrive. You cannot file your first report without them. So don’t leave it to the week before payday.
Thresholds change most tax years. Check the current figures before you run payroll.
What do PAYE tax codes mean?
A tax code tells you how much tax-free pay an employee gets. The most common code is 1257L, worth £12,570 of tax-free pay. HMRC issues the code and sends it to you. You apply it on every pay run until HMRC changes it.
The number is the allowance divided by ten. So 1257 means £12,570. The letter explains the situation:
- L: the standard Personal Allowance
- BR: all pay taxed at the basic rate
- D0: all pay taxed at the higher rate
- NT: no tax deducted at all
- K: the employee owes more tax than the allowance covers
BR usually means the employee has a second job. Their main job has already used up the allowance. A new starter without a P45 may go on an emergency code, so ask them to complete HMRC’s starter checklist.
Use the new code from the next payroll run. Do not keep using the old one. A wrong code is one of the most common PAYE mistakes, and it can leave an employee overpaying or underpaying for months before anyone notices.
What happens on each payroll run?
The same seven steps happen every time you pay your staff. Work out gross pay, apply the tax code, deduct tax, National Insurance and anything else that applies, then issue payslips and file a report with HMRC.
- Work out gross pay for the period.
- Apply the tax code HMRC gave you.
- Deduct Income Tax and employee National Insurance.
- Deduct student loan repayments if the employee has a plan.
- Deduct workplace pension contributions.
- Give a payslip on or before payday.
- Send a Full Payment Submission to HMRC on or before payday.
The payslip must show gross pay, each deduction and net pay. List every deduction on its own line. If pay changes with hours, show the hours worked. Adding the tax code and year-to-date totals saves a lot of questions later.
The Full Payment Submission, or FPS, sits at the centre of Real Time Information. Include everyone you pay, even part-timers earning under £96 a week. Leaving them out is a common mistake.
Payroll software does the calculations and files the FPS for you. HMRC also offers its own Basic PAYE Tools.
Your employer cost sits outside these deductions. You pay National Insurance on top of each wage. The rates and thresholds change most years. We cover employer National Insurance contributions in a separate guide.
Pension deductions come with their own rulebook. The Pensions Regulator sets a duty date for every new employer. Our guide to employer auto-enrolment duties explains the setup.
What do you report to HMRC and when?
You send a Full Payment Submission to HMRC on or before every payday. You send an Employer Payment Summary by the 19th when needed. The EPS claims back statutory pay and the Employment Allowance. You also tell HMRC about starters and leavers.
Real Time Information means just that. HMRC wants the data on payday, not at year end. A tax month runs from the 6th to the 5th, and every deadline hangs off those dates.
The FPS carries pay, deductions and National Insurance for each person. The EPS carries any reductions. Send an EPS to claim statutory maternity, paternity or adoption pay. You also send one to claim the Employment Allowance once a tax year. Limited company subcontractors use it to reclaim CIS deductions.
New starters go on the next FPS. For a leaver, record the leaving date and give them a P45. The next employer uses that P45 to set the right code from day one.
What if you pay nobody in a tax month?
Send an Employer Payment Summary instead of a Full Payment Submission. The deadline is the 19th of the following tax month. Miss it and HMRC may estimate your bill and charge a penalty. You can also tell HMRC about up to 12 months of inactivity in advance.
Seasonal businesses hit this every year, and so do companies between contracts. A quiet month can feel like nothing to report, but HMRC sees it differently. No FPS and no EPS looks like a missed filing.
Send the EPS by the 19th of the following tax month. GOV.UK sets out what to report when you pay no employees in full.
You can also plan ahead by entering a period of inactivity for up to 12 months. Do that and HMRC stops expecting reports from you. Skip it and HMRC may estimate the bill and add a penalty on top.
This is the gap most guides leave open. A dormant month still needs a filing.
When do you pay HMRC?
Pay HMRC by the 22nd of the month after the tax month. If you pay by post, the cheque must arrive by the 19th. Small employers can ask HMRC to pay quarterly instead. HMRC charges daily interest on late payments.
The amount is easy to work out. Take the tax and National Insurance from your FPS, then subtract any reductions you claimed on the EPS. The balance is what you owe.
Quarterly payments suit very small payrolls. You need to expect under £1,500 a month. Call HMRC’s payment helpline to set it up. HMRC will not switch you over automatically.
Your HMRC online account shows the balance a few days after you file. Check it against your own payroll figures every month. A gap usually means a missing or duplicated FPS. Catching that in month two is cheap. Catching it in month ten is not.
What payroll records must you keep?
Keep records for 3 years from the end of the tax year. That includes pay, deductions, reports, payments, leave and tax code notices. It also covers taxable expenses and benefits. Poor records can cost you a penalty of up to £3,000.
The list HMRC expects you to hold:
- what you pay staff and what you deduct
- the reports you send to HMRC
- the payments you make to HMRC
- employee leave and sickness absence
- tax code notices from HMRC
- taxable expenses and benefits
- Payroll Giving Scheme paperwork
HMRC's payroll record-keeping rules set that 3-year limit. Lose your records and you must tell HMRC quickly. You also have to rebuild them as best you can. HMRC may estimate the tax and charge up to £3,000.
That penalty catches people out. Most owners assume records only matter during an enquiry. The rule stands whether HMRC ever looks or not.
What are the year-end PAYE tasks?
The tax year ends on 5 April and starts again on 6 April. Send your final payroll report of the year on or before the last payday. Give every employee a P60 by 31 May. Report expenses and benefits by 6 July.
| Task | Deadline |
|---|---|
| Final payroll report of the year | On or before your employees’ payday |
| Update employee payroll records | From 6 April |
| Update payroll software | From 6 April |
| Give employees a P60 | By 31 May |
| Report employee expenses and benefits | By 6 July |
The P60 shows total pay and tax for the year. Employees may need it for mortgages, tax refunds and self assessment. Give one to everyone still on your payroll on 5 April.
Payroll software usually pushes an update in early April. Install it before your first pay run of the new year. Running April pay on last year’s rates creates corrections all summer.
Does PAYE apply if you’re self-employed?
No. Sole traders pay their own tax through self assessment, not PAYE. PAYE only starts when you pay other people a wage. A sole trader with two staff runs PAYE for those two, and a limited company director’s salary goes through PAYE as well.
The two systems can run side by side. You might file a self assessment return for your own income while also running PAYE for the people you employ. One does not replace the other.
Employment status is where this gets expensive. Some businesses treat a worker as self-employed to avoid PAYE. HMRC can look at the working reality and disagree. Check the status properly before the first payment, not after.
Where employers most often go wrong
- using an old tax code after HMRC sent a new one
- filing the FPS after payday instead of on or before
- forgetting the EPS in a month with no wages
- not issuing a P45 when someone leaves
- paying HMRC after the 22nd
- treating a worker as self-employed when HMRC sees an employee
- missing the P60 and expenses deadlines in May and July
Most of these cost money twice: first the penalty, then the time spent fixing the records. The status question is the expensive one. HMRC can reclassify a contractor as an employee, then ask for the tax, the National Insurance and a penalty.
PAYE never stops. It runs every month of every year. One missed report can trigger a chain of corrections. DASA's payroll service covers registration, payslips, RTI filing and year-end forms. Get a quote and we’ll send you our current pricing.
Written by Raqeeb Marzook, ACCA, Manager at DASA Accountancy.
This article gives general information about PAYE for UK employers. It’s not tax, financial or legal advice. Rates, thresholds and deadlines change. Check the current HMRC guidance before you act. Speak to a qualified accountant about your own situation.
FAQs
What is PAYE?
PAYE means Pay As You Earn. It’s HMRC’s system for collecting Income Tax and National Insurance from wages. As an employer, you deduct both before you pay your staff, then send the money to HMRC.
Do all employers have to register for PAYE?
You must register if you pay an employee £96 or more a week, or if they get expenses or company benefits, a pension, have had another job, or have had Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit. If none apply, you still keep payroll records.
When do you have to pay HMRC for PAYE?
By the 22nd of the month after the tax month if you pay online. If you pay by post the cheque must reach HMRC by the 19th. Small employers expecting under £1,500 a month can ask to pay quarterly.
What do you do if you pay no employees in a month?
Send an Employer Payment Summary instead of a Full Payment Submission, by the 19th of the following tax month. If you don’t, HMRC may estimate what you owe and charge a penalty.
How long must an employer keep payroll records?
3 years from the end of the tax year they relate to. If you don’t keep full records, HMRC may estimate what you owe and charge a penalty of up to £3,000.
Does PAYE apply to the self-employed?
No. Sole traders pay their own tax through self assessment. PAYE applies when you pay other people, including a director’s salary.