How Pay As You Earn (PAYE) Works for Employers

You’ll normally need to register as an employer for the Pay As You Earn (PAYE) scheme the first time you take on an employee who is paid more than £5,000 per year (or £96 per week). Once registered, you’ll need to deduct the tax and National Insurance your employees owe on their wages each time you run payroll, and then report these amounts to HMRC.

What employers need to do for PAYE

The PAYE system basically sees employers act as a tax collector on behalf of HMRC. You’ll make deductions from your employees’ wages before you pay them, and then send these on to HMRC along with a report which explains what amounts were paid and deducted – and why.

It means employees can pay tax and National Insurance on their wages in instalments, rather than getting a scary looking tax bill at the end of each year.

What sort of PAYE deductions will I need to make?

Employers operate PAYE as part of their payroll, deducting things like:

• Income tax
• National Insurance (you’ll add your own contribution as an employer to your employee’s contribution)
• Pension contributions (which you might also need to contribute to)
• Student loan repayments
• Court-ordered payments such as Child Maintenance
• Salary sacrifice payments

Do I need to register for PAYE?

You’ll need to register for PAYE if any of your employees (including yourself as a company director!) are paid more than £96 per week. Some contractors also need to register for PAYE so they can become CIS registered – usually because they’re using subcontractors for construction work. You can estimate the cost of hiring someone using our online salary and deductions calculator.

When do I need to register as an employer?

Make sure you register as an employer for PAYE before the first payday. You can’t register more than 2 months beforehand, but keep in mind it can take up to 15 working days for your PAYE reference number to come through. This is sometimes also called an Employer Reference Number.

What should I tell HMRC about my employees?

It’s your responsibility to tell HMRC about the people you employ and how much you pay them, as well as the details of any statutory payments such as sick pay. You should also let them know if you no longer employ anyone and need to deregister from PAYE.

This information is reported using Real Time Information (RTI) submissions, which get their name because updates are sent as they happen rather than waiting till the end of the year to report everything. They must be sent using special payroll software.

Full Payment Submission (FPS): Tell HMRC about who you employ and what you pay them

Send a Full Payment Submission (FPS) to report your employees’ pay and any deductions each time you pay them – even if they get less than the £96 per week threshold to register for PAYE.

Each Full Payment Submission (FPS) should include:

• Your PAYE Employer’s Reference Number which HMRC sent when you registered as an employer
• The details of each employee you paid in that pay period (so if someone hasn’t been paid, don’t include them in the FPS)
• Information about each employee’s pay, deductions, and the total deductions made so far in this tax year (called the year-to-date totals)
• Your information as the employer
• Contributions you must make as an employer, such as employer’s National Insurance and pension contributions
• Any extra information, such as the details of any new employees or leavers, or if you start paying an employee a workplace pension

Send your Full Payment Submission (FPS) on or before each payday

For example, if you pay employees on the 12th of each month, this will also be the latest date you can send an FPS for that pay period.

Sending an Employer Payment Summary (EPS)

You’ll need to submit an Employer Payment Summary (EPS) if you:

• Don’t pay any employees during a tax month (which starts on the 6th of each month). If that happens, you’ll send the EPS instead of making a Full Payment Submission (FPS).
• Need to claim the Employment Allowance against any employer’s National Insurance contributions you make (you’ll send an EPS and an FPS)
• Need to reclaim any statutory payments you made to an employee, such as statutory sick, maternity, or paternity payments (you’ll send an EPS and an FPS)

Send your Employer Payment Summary (EPS) by the 19th of the following tax month

For example, an Employer Payment Summary (EPS) for the tax month 6th June to 5th July is due by 19th July.

Making PAYE payments to HMRC

HMRC use your Real Time Information submissions to work out your PAYE bill for the tax month, and what allowances you can claim against it. A tax month starts on the 6th of one month, and ends on the 5th of the following month. The bill is worked out based on:

• The deductions you made from your employees’ wages (which you must pass on to HMRC)
• Any contributions you also need to make as their employer, such as employer’s National Insurance or pension contributions
• Any allowances you can deduct, such as the Employment Allowance

Pay your PAYE bill by the 22nd of the following month (19th if you pay by post)

For instance, if you report payroll data for March, you’ll have until 22nd April to pay online.

How do I know what PAYE deductions to make?

You can ask someone to operate payroll on your behalf (such as an accountant or payroll provider), but if you decide to run payroll yourself then you’ll need payroll software.

The software must be compatible for payroll reporting, and able to calculate wages and deductions correctly based on the information you provide about each employee, such as their tax code. These calculations can be based on multiple factors and very complex!

The instalments are calculated based on what an employee is expected to earn during a tax year, taking into consideration their personal allowance.

You’ll also need to give your employees a payslip each time you pay them so they know how their pay was calculated, and what deductions were made.

Find out more about our online accounting services, including payroll and tax returns. You can also call us on 020 3355 4047 or get an instant online quote.