PAYE is operated by employers as part of their payroll, deducting tax and National Insurance before paying an employee their wages. Other deductions, such as pension contributions or student loan repayments, can also be processed through payroll.
Employers basically act as a tax collector on behalf of HMRC, deducting the tax that an employee will owe on their wages, and then sending it on to HMRC along with a report which explains the amounts.
Why is PAYE deducted?
PAYE means that 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. The instalments are calculated based on what an employee is expected to earn during a tax year, taking into consideration their personal allowance.
Do I need to register for PAYE?
You’ll need to register for PAYE if you have any employees paid £123 a week or more, even if you’re the only employee (for instance, because you’re a director in your own limited company).
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 that 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.
Complete managed payroll service
From just £12.00 per payslip
What are my reporting responsibilities as an employer?
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 (or your accountant or payroll provider) will need to use special payroll software to submit this information.
You might sometimes see these called Real Time Information (RTI) submissions, because the updates are sent as they happen, rather than waiting till the end of the year to report everything.
There are different types of submission depending on the information you need to report.
Sending a Full Payment Submission (FPS)
Send a Full Payment Submission (FPS) to report your employees’ pay and any deductions each time you pay them – even if you pay them less than the £123 per week threshold to register for PAYE. Each Full Payment Submission (FPS) should include:
The details of employees that you’ve 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 and deductions
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.
Sending an Employer Payment Summary (EPS)
If you don’t pay any employees one month, you’ll need to submit an Employer Payment Summary (EPS) instead of making a Full Payment Submission (FPS).
You can also send an Employer Payment Summary (EPS) as well as an FPS, for instance because you need to claim the Employment Allowance against any employer’s National Insurance contributions you make, or to reclaim different types of statutory pay such as maternity, paternity or adoption payments.
Send an Employer Payment Summary (EPS) by the 19th of the following tax month.
For example, if you need to submit an Employer Payment Summary (EPS) for the tax month which starts 6th June and ends 5th July, the deadline is 19th July.
See how much you owe or can claim
HMRC will use the information you send in these submissions to calculate anything you can claim for, and your PAYE bill for the tax month. 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)
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 to calculate pay and deductions correctly.
These could include income tax, National Insurance, pension contributions and student loan repayments, for example.
What is a tax code?
HMRC allocate tax codes so employers and pension providers can work out the amount of tax they need to deduct from an employee’s wages or pension payments.
You should ask each employee to complete a New Starter Checklist so you can collect the information needed to operate the correct tax code against their pay.
Tax codes can sometimes change, for example if an employee has asked HMRC to collect their Self Assessment tax bill through their tax code, although this is not the only reason! Tax codes might also change if an employee is claiming certain benefits or receiving a pension.