If you’re taking on employees for the first time—or growing your team—understanding PAYE (Pay As You Earn) is essential. PAYE is HMRC’s system for collecting Income Tax and National Insurance directly from employee wages, and it’s a legal requirement for nearly every UK employer.
Whether you’re a small business owner, a director of a limited company, or managing payroll for a growing team, this guide will walk you through everything you need to know to stay compliant and run PAYE smoothly.
What Is PAYE?
PAYE is HMRC’s method for collecting tax and National Insurance contributions from employees’ earnings. As an employer, you’re responsible for:
- Calculating the correct tax and NI
- Deducting these amounts from your employees’ wages
- Paying these deductions to HMRC
- Reporting this information in Real Time Information (RTI) submissions every time you run payroll
You may also need to handle student loan repayments, pension contributions, statutory payments (like sick pay or maternity leave), and other deductions.
When Do You Need to Register for PAYE?
You must register as an employer with HMRC before your first payday if you:
- Have employees earning above the Lower Earnings Limit (currently £123/week)
- Provide benefits, expenses, or pensions
- Employ yourself as a director of a limited company and take a salary
Registration is done online and usually takes up to five working days. Once registered, HMRC will issue you an employer PAYE reference number and an Accounts Office reference.
Even if your employees earn below the tax threshold, you may still need to operate PAYE for reporting purposes.
Running Payroll Under PAYE
Once you’re registered, you’ll need to run payroll regularly—usually weekly or monthly. Each payroll cycle involves:
- Calculating gross pay (including bonuses or overtime)
- Deducting Income Tax and NI based on the employee’s tax code
- Adding any employer contributions (e.g. NI or pensions)
- Issuing a payslip to your employee
- Reporting the payment to HMRC via RTI, on or before payday
- Paying the deductions to HMRC—either monthly or quarterly, depending on your payment schedule
Accurate record-keeping is critical, and most businesses now use payroll software to automate calculations and reporting.
Key Responsibilities as an Employer
Running PAYE involves more than just submitting numbers to HMRC. You also need to:
- Monitor tax codes and update them when HMRC advises
- Keep detailed payroll records for at least three years
- Enrol eligible employees in a workplace pension scheme and manage auto-enrolment
- Handle statutory payments, such as Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP)
- Provide P60s at year-end and P45s when employees leave
- Submit a Final Submission at the end of each tax year
Getting any of these steps wrong can result in fines, late payment interest, and unhappy employees.
PAYE and Directors
If you’re a director of a limited company, you are typically classed as an employee for PAYE purposes. Many directors pay themselves a combination of salary and dividends, which must be calculated carefully to remain tax-efficient and compliant.
Running director payroll differs slightly from standard employee payroll—especially in how NI is calculated—so it’s wise to seek professional advice here.
How Majestic Accountants Can Help
At Majestic Accountants, we offer full PAYE and payroll services tailored to your business. Whether you need help setting up as an employer, managing ongoing payroll, or ensuring your HMRC submissions are correct and on time, our expert team handles it all—giving you peace of mind and more time to focus on your business.