Understanding How Pay As You Earn (PAYE) Works | The Accountancy Partnership (2024)

You’ll normally need to register as an employer for the Pay As You Earn (PAYE) scheme when you take on your first employee. Once registered, you’ll need to deduct the tax and National Insurance that your employees owe on their wages each time you run payroll, and then report these amounts to HMRC.

How does PAYE work?

The PAYE system basically sees employers 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 paid and deducted.

Employers operate PAYE as part of 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.

Why was PAYE introduced?

PAYE stands for Pay As You Earn, and the system 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. 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 and be issued your employer reference number (also known as a PAYE number) 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).

Some contractors also need to register for PAYE so they can become CIS registered – usually because they’re using subcontractors for construction work.

When should I 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 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.

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, or tell HMRC that you no longer employ anyone and need to deregister from PAYE.

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
  • Your PAYE Employer’s Reference Number which HMRC sent when you registered as an employer
  • Your information as the employer
  • National Insurance
  • 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)
  • Any contributions you also need to make as their employer, such as employer’s National Insurance or pension contributions

The deadline to pay your PAYE bill is 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.

Learn more about key tax year dates for payroll.

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 to calculate pay and deductions correctly.

These could include income tax, National Insurance, pension contributions and student loan repayments, for example. You’ll need to give your employees a payslip each time you pay them, so they know how their pay was calculated, and what deductions have been made.

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.

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.

Understanding How Pay As You Earn (PAYE) Works | The Accountancy Partnership (2024)
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