PAYE (Pay As You Earn) is the HM Revenue & Customs (HMRC) system for collecting income tax from the pay of employees, including directors, as they earn it.
As an employer, you need to deduct income tax and National Insurance contributions (NICs) from your employees' pay and submit the deductions to HMRC.
Employer's responsibility for PAYE
If you employ people, including any directors of a limited company, you will need to deduct income tax and National Insurance contributions (NICs) from their pay before they receive it.
As an employer, you need to know how to calculate the correct income tax deductions, taking account of the various rates, allowances and limits that exist.
By the 19th of each month - or, if you make electronic payments, by the 22nd of each month - you will have to send the most recent amounts you have deducted from all your employees' pay to HM Revenue & Customs (HMRC). If your average monthly payments are likely to be less than £1,500 you may be able to pay them quarterly.
If you pay too little or too late, you may incur interest on these amounts, or a fine.
On the end of the tax year you should find that there are outstanding payments to make on 5 April at the end of the tax year, your Accounts Office must receive these by 19 April. This is important to remember as you will have to pay interest on late payments.
Employees and directors are also taxed on benefits in kind, such as a company car or medical insurance, and as an employer you will have to pay Class 1A NICs on benefits as employer. You do not have to pay these contributions under the PAYE (Pay As You Earn) system - you do so at the year end.
Getting started with PAYE
When you first start employing people, you may find it a challenge dealing with all the forms and procedures involved in organising your payroll. You will learn the parts of the PAYE (Pay As You Earn) system that apply to your particular business situation in stages, as and when they apply to your business.
At first, many employers decide to use an outside supplier to run their payroll for them.
Please see our
. An experienced
person can tell you what systems and forms to use, making sure you don't miss out any essential steps.
But remember you are still legally responsible for any mistakes.
If you want to invest in a payroll software package, you must check if it complies with HM Revenue & Customs (HMRC)
When to apply PAYE
PAYE (Pay As You Earn) is applied to all payments an employee receives as a result of working for you, including:
- salary and wages
- overtime, shift pay and tips
- expense allowances and claims (this only applies where these are paid in cash and, for expense payments,
only if they fall within specific criteria - for more details, see our guide on business expenses and
- bonuses and commission
- Statutory Sick Pay
- Statutory Maternity/Paternity/Adoption Pay
- lump sum and compensation payments - such as redundancy payments - unless they are exempt from tax
Note that income tax and National Insurance contribution rates and thresholds may change from year to year. See our guides on
Income tax rates and allowances
PAYE forms - and when to use them
PAYE has to cater for many different employment and tax situations. There are basic forms and procedures which almost every employer needs to use to operate the system. You should use these forms to keep a record of everything you've paid your employees, including wages, payments and benefits. The following are some of the main forms you will come across.
Forms for employees
There are three main forms to give to your employees, which show how much income tax and National Insurance contributions (NICs) they have paid.
- these are internal forms that you create and give to your employees to show how their pay has been calculated
- new employees who have had a job before will bring this to you when they start to work for you. In turn, you give them a completed P45 when they leave, which they pass on to their new employer.
- this shows the tax deducted for the whole tax year, and is given to each employee at the end of the tax year.
You can order form
P60 from our
on line shop
Forms for employer
Form P11 -
use this form to
work out and record
all the income tax
you make from the
wages of each
employee in any
single pay period.
Exactly how you
depend on the
employee's tax code.
Using this tax code
and a set of tax
tables and National
you find out how
much to deduct from
or refund to the
Form P32 -
use this form to keep a detailed record of the total payments you make to HMRC for each pay period. You will need this information when you complete your employer's annual return (P35). If you fail to keep a proper record, either on form P32 or in a payslip booklet (P30BC), then HMRC
may ask you to make
payments based on
its own estimates.
The end of the tax year
P14 end of year summary for each of your employees - summarising all payments made to them and deductions from their earnings in the year. A copy of this must be given to employees as a P60 employee's certificate of pay, tax and NICs.
P35 employer's annual return showing total PAYE (Pay As You Earn) deductions for all employees.