What is PAYE? How Pay As You Earn tax works for employers

Published Wednesday 26 November 2025

Table of contents

• What is PAYE?
• How PAYE works
• When to register for PAYE
• PAYE deductions
• PAYE deadlines
• How to set up PAYE payroll
• What does a PAYE payslip look like?
• How to pay HMRC through PAYE

Key takeaways

• Register for PAYE before your first payday if any employee earns £123 or more per week, receives benefits, has another job, or receives certain government allowances, allowing up to 30 days to receive your employer reference number from HMRC.

• Deduct Income Tax and National Insurance contributions from employee wages using their tax codes and submit these payments to HMRC by the 22nd of the following month for online payments or by the 19th for postal payments.

• Choose HMRC-recognised payroll software to automatically calculate deductions, generate compliant payslips, and submit reports to HMRC, ensuring accuracy while reducing the risk of tax calculation errors.

• Provide employees with payslips on or before every payday showing gross wages, all deductions, net pay, and hours worked to maintain transparency and comply with legal requirements.

What is PAYE?

PAYE (Pay As You Earn) is HMRC's system for collecting Income Tax, National Insurance, and other deductions directly from employee wages before they receive their pay.

As an employer, you deduct the required amounts from your employees’ wages and send them to HMRC using payroll software.

What you must do for PAYE

• Keep accurate records of all payments and deductions for each employee
• Notify HMRC when employees join or leave your business
• Forward all deducted amounts to HMRC by the required deadlines

How PAYE works

The PAYE (Pay As You Earn) system is how you, as an employer, collect Income Tax and National Insurance contributions directly from your employees' pay. This happens before they receive their wages.

This way, tax is paid gradually throughout the year instead of as one large bill.

When to register for PAYE

You need to register for PAYE if any of the following apply to your employees in the current tax year:

• they're paid at or above the lower earnings limit. For the 2024/25 tax year that's £123 or more a week
• they receive expenses and company benefits
• they receive a pension
• they've had another job
• they've received Jobseeker's Allowance, Employment and Support Allowance, or Incapacity Benefit

Make sure you're registered for PAYE before the first payday – but no more than two months in advance.

HMRC will send you an employer reference number. You use this unique identifier to report to HMRC and communicate with them about your payroll. It can take up to 30 days to receive your number, so register early.

PAYE deductions

PAYE deductions are amounts you must take from employee wages before paying them. The exact deductions depend on each employee's circumstances and tax code.

Standard deductions for most employees:

• Income Tax: Based on their tax code and salary band
• National Insurance: Calculated on earnings above the threshold

Additional deductions when applicable:

• Student loan repayments: For employees with outstanding student loans
• Attachment of earnings orders: Court-ordered deductions for debts
• Pension contributions: Workplace pension scheme deductions

Payroll software calculates these amounts automatically, but you remain responsible for accuracy – a significant responsibility, as errors can lead to situations where 5.5 million people overpay tax annually, with more than half of them being the lowest paid.

PAYE deadlines

PAYE payment deadlines depend on your business size and expected annual PAYE bill.

Monthly payments (most businesses):

• Due date: 22nd of the following month for online payments
• Postal payments: Must reach HMRC by the 19th

Quarterly payments (smaller businesses):

• Eligibility: Businesses expecting to pay less than £1,500 annually
• Due date: 22nd of the month following each quarter end
• Example: April-June quarter due by 22 July

If you expect to pay less than £1,500, contact HMRC's PAYE helpline to request quarterly deadlines.

How to set up PAYE payroll

Setting up PAYE payroll involves registering with HMRC and choosing the right software to handle calculations and submissions. Here's how to get started:

1. Register as an employer with HMRC

Tell HMRC you are hiring by registering as an employer on their website. You will get a PAYE reference number to access your online PAYE account. You can check what you owe, pay your bill, and receive notices from HMRC.

If you run a limited company, register for PAYE online. Other business types may need a different method – check the HMRC registration page for details. Allow 30 days to receive your PAYE reference number.

2. Choose a payroll software

Choose payroll software that fits your business needs.

With HMRC-recognised payroll software, the software calculates deductions for you. Once you set up pay rates and instructions, you can send reports to HMRC and produce payslips to distribute to employees.

What does a PAYE payslip look like?

Give employees a payslip on or before every payday. Payslips show how you calculated their take-home pay after deductions.

Required payslip information:

• Gross wages: Total pay before any deductions
• PAYE deductions: Income Tax, National Insurance, and other deductions
• Net wages: Final take-home pay after all deductions
• Hours worked: Required if pay varies by hours

Optional but helpful details:

• Tax code: Shows the employee's current tax status
• National Insurance number: For employee reference
• Year-to-date totals: Running totals for tax year

Modern payroll software generates compliant payslips automatically and can email them directly to employees.

How to pay HMRC through PAYE

Paying HMRC through PAYE means calculating the correct deductions for each employee, then submitting the total amount by your deadline.

Payroll software handles the calculations for you. Here is what it calculates:

1. Deduct Income Tax

Use your employees' unique tax codes to calculate their Income Tax. The tax collected through PAYE cannot exceed 50% of an employee's income. Employees may fall into different tax brackets, such as 20%, 40%, or 45%.

7. Submit payments to HMRC

Monthly PAYE payments are due on the 22nd of the following month if you pay online. If you pay by Direct Debit, you may see temporary interest charges, but HMRC will reverse these once the payment clears. If you pay by cheque, your payment must reach HMRC by the 19th.

Interest and penalties apply for late payments. A payment is considered late if it is made on or after the 5th of the tax month after it was due.

Along with the payments and deductions outlined above, your PAYE bill could include:

• Employer National Insurance
• Construction Industry Scheme (CIS) deductions
• Apprenticeship Levy payments