Taking on your first member of staff is a milestone — and the moment you become responsible for collecting tax on the government's behalf. PAYE is the machinery that makes that happen: every payday, you work out what to deduct, report it to HMRC, and pass the money on. Done well it is routine; done badly it leads to penalties and unhappy staff. This guide explains what PAYE is, what you must deduct and report, the deadlines that matter, the forms involved, and how to keep on the right side of HMRC. This is general information, not tax or legal advice.
What it is
PAYE — Pay As You Earn — is the system employers use to deduct Income Tax and National Insurance contributions from employees' wages and pay them to HMRC. Rather than employees settling their whole tax bill at the end of the year, tax is taken from each payslip as they earn, hence the name.
As an employer, you do not just pay wages — you operate PAYE on HMRC's behalf. That means calculating the right deductions for each person, recording them, reporting them to HMRC, and paying over the tax and National Insurance you have withheld (plus the employer's own National Insurance). For the employee's side of how this works, our explainer on what PAYE is is a useful companion to this employer-focused guide.
When you must operate PAYE
Not every payment triggers PAYE, but most employment does. You generally need to register as an employer and operate PAYE if any of your employees:
- Earns at or above the lower earnings limit (a threshold set each tax year);
- Already has another job;
- Receives a pension; or
- Receives expenses or benefits.
In practice, if you are paying someone a normal wage, you will almost certainly need to operate PAYE. Even where an employee earns too little to pay any tax, you may still need to register and report their pay. You should usually register before your first payday, and registration can take a little time, so do not leave it to the last minute. If you are at the very start of this, our guide on how to hire your first employee sets the wider scene.
PAYE is not optional once you employ someone above the threshold. It is a legal duty, and registering late or failing to report can lead to penalties.
What you deduct and report
PAYE is more than just Income Tax. Each payday, you typically calculate and handle:
- Income Tax — based on the employee's tax code and earnings.
- National Insurance contributions — both the employee's and the employer's share. See our explainer on National Insurance for how the classes and thresholds work.
- Student loan and postgraduate loan repayments — where the employee is liable.
- Pension contributions — including those under auto-enrolment, where applicable.
- Other adjustments — such as statutory payments for sick leave or family leave, and any attachment of earnings orders.
The employee's tax code is central: it tells you how much tax-free pay they are entitled to and therefore how much to deduct. Codes come from HMRC and can change during the year, so you must apply updates promptly.
Reporting in real time
The UK runs PAYE on a Real Time Information (RTI) basis. This means you report pay and deductions to HMRC every time you pay an employee, on or before payday — not once a year. The two key submissions are:
| Submission | Purpose |
|---|---|
| Full Payment Submission (FPS) | Reports each employee's pay, tax and deductions, sent on or before payday |
| Employer Payment Summary (EPS) | Reports adjustments, such as reclaiming statutory payments or telling HMRC no one was paid that period |
You make these submissions through payroll software. Most employers use commercial payroll software or an accountant; HMRC also provides basic free tools for very small employers, though these have limits. Whatever you use, the principle is the same: report on time, every time.
Paying HMRC: the deadlines
After reporting, you pay HMRC what you owe — the tax and National Insurance you deducted, plus employer's National Insurance, less anything you can reclaim. The usual deadlines are:
- Monthly: by the 22nd of the following tax month if you pay electronically (the 19th if paying by post).
- Quarterly: if your average monthly PAYE liability is below a set amount, you may pay quarterly instead.
Missing these deadlines can trigger interest and penalties, so build the payment into your routine. Setting money aside as you run each payroll helps avoid a nasty surprise when the bill is due.
Payslips, P60s, P45s and benefits
PAYE comes with obligations to your employees as well as to HMRC. You must:
- Give a payslip to each employee on or before payday, showing gross pay, deductions and net pay.
- Provide a P60 after the end of the tax year, summarising the employee's total pay and tax for the year.
- Issue a P45 when an employee leaves, so they can give it to their next employer. Our explainer on what a P45 is covers what it contains.
- Report expenses and benefits you provide, where required. Certain taxable benefits in kind are reported, often via a P11D, and may affect the employee's tax code.
You must also keep payroll records for the period HMRC requires (currently several years), covering what you paid, what you deducted and reported, and any leave and benefits.
Staying compliant
PAYE is manageable, but it rewards good habits:
- Register in good time before your first payday.
- Use reliable payroll software or a competent accountant to handle calculations and RTI submissions.
- Apply tax codes and updates from HMRC promptly.
- Report on or before payday, every payday.
- Pay HMRC by the deadline, and set the money aside as you go.
- Keep clear records and give employees their payslips and year-end documents.
Payroll also overlaps with wider employment matters. Different contract types — for example a zero-hours contract — still go through PAYE when the person is your employee, and even when employment ends, perhaps via a settlement agreement, some payments may be taxable through payroll. Getting the basics right keeps all of this straightforward.
The bottom line
PAYE is the system that turns you, the employer, into a collector of Income Tax and National Insurance for HMRC. You register before your first payday, deduct the right amounts each time you pay staff, report them in real time through payroll software, pay HMRC by the monthly or quarterly deadline, and give employees their payslips and year-end forms. It is a legal duty with real penalties for getting it wrong, but with good software or a reliable accountant and a steady routine, it becomes a predictable part of running a business. This is general information, not tax or legal advice; check GOV.UK and HMRC, and take professional guidance for your circumstances.