How does PAYE work?

PAYE, or ‘Pay as You Earn’ is HMRC’s system to collect income tax and National Insurance Contributions (NICs) from people who are employed by an individual or organisation, as opposed to being self-employed or not currently working. Organisations that employ people must register for PAYE unless none of their employees earn over £118 per week, receive expenses or benefits, have another job or are paid a pension. However, all organisations and individuals with employees must keep accurate payroll records detailing what each employee receives, and in what form, e.g. wages, benefits, sales commission, bonuses etc. This can be done via compatible bookkeeping software.

What should you include on PAYE?

Deductions made for tax and NICs should be taken into account when setting your employees’ salary, wages and other financial remuneration arrangements. Income tax and NICs are deducted at source, so your employees will not normally see them in their wages or salary payments. This helps to simplify tax arrangements for people whose only income is from being employed, as they normally will not have to register for self-assessment, unless they receive supplementary incomes elsewhere. Payments to employees that must be applied to PAYE include salary or wages, any tips or bonuses, statutory sick and maternity pay. You may also need to declare other aspects to give the full picture, such as student loan repayments or company pension contributions.

Employee payments and tax deductions must be reported via PAYE before every pay day. You can use your payroll software to work out the amounts. This will include your own employer’s NICs on each of your employee’s earnings above £166 per week. You will need to include any deductions that you are entitled to claim back for as an employer, e.g. statutory pay. Small businesses can apply to pay PAYE quarterly, if expected salaries and employee outgoings are expected to be less than £1,500 per month.

Reporting procedure

You also need to report other employee arrangements via your PAYE system, such as when people join or leave your organisation, if their circumstances change, e.g. they need to claim sick or maternity pay, when an employee reaches State Pension age, or if you make anyone a company director. You will also need to submit annual reports at the end of the tax year, which should include any and all expenses or benefits paid out. You are normally expected to report your payroll online, however there are some extenuating circumstances, including certain religious or medical reasons that preclude you from using a computer. In these cases, you would submit your PAYE report on paper instead.

Find out more

To find out more about PAYE, how to recruit, employ and remunerate employees and other, related employer obligations, such as liability insurance, health and safety at work, accessibility issues and pensions, take a look at the UK Government’s website at www.gov.uk.