Introduction to PAYE

PAYE (Pay As You Earn) is HMRC's system for collecting Income Tax and National Insurance Contributions (NICs) from employees' wages or salaries. As an employer, you must operate PAYE if you pay employees above the National Insurance Lower Earnings Limit or if they receive benefits, expenses, or have another job or pension.

PAYE ensures employees pay the right amount of tax throughout the year, avoiding large year-end bills. It is a legal requirement, and getting it right protects your business from costly penalties.

Registering as an Employer for PAYE

Before your first payday, you must register with HMRC. The registration requires:

• Business type and structure
• Company UTR and Companies House number (if limited)
• First payday and employee’s details

Once registered, HMRC issues your PAYE reference number. Setting up a Government Gateway account is essential to access PAYE services online.

Key Components of PAYE

Income Tax

• Personal Allowance (2025/2026): £12,570
• Rates – England, Wales, NI:
  • 20% Basic Rate (up to £50,270)
  • 40% Higher Rate (£50,271–£125,140)
  • 45% Additional Rate (over £125,140)
• Scotland Income Tax Bands (2025/2026):
  • Starter Rate: 19%
  • Basic: 20%
  • Intermediate: 21%
  • Higher: 42%
  • Advanced: 45%
  • Top: 48%
• Tax Codes: Reflect allowances and adjustments (e.g., 1257L, K codes)
• High earners: Personal Allowance reduces by £1 for every £2 earned over £100,000, disappearing at £125,140.

National Insurance Contributions (NICs)

• Employee (Class 1): Rates based on earnings thresholds and category (A, B, C, etc.)
• Employer (Class 1): 2025/2026 Rate increased from 13.8% to 15%, Secondary Threshold reduced to £5,000 from April 2025
• Reliefs: Employment Allowance (up to £5,000/year), Apprentices under 25, Freeports & Investment Zones

Other Deductions

• Student Loans (Plans 1, 2, 4, Postgrad)
• Pension contributions (Auto-Enrolment)
• Child maintenance
• Payroll Giving (GAYE)
• Attachment of Earnings Orders

Running Payroll and RTI

• FPS (Full Payment Submission): Sent to HMRC on or before payday; includes pay, deductions, and employee details.
• EPS (Employer Payment Summary): Used to claim reductions or report no payments.
• Payroll Software: Must be HMRC-recognised.
• Record Keeping: Minimum of 3 years.

Payments to HMRC

• Deadlines: 22nd of the following month (or 19th by post).
• Methods: Direct Debit, Faster Payments, CHAPS, BACS.
• Quarterly Payment Option: Available for those paying less than £1,500/month.

Employee Benefits and Expenses

• Taxable Benefits: e.g., company cars, private medical insurance.
• Reporting via: PAYE or P11D.
• Payrolling Benefits: Option to tax via payroll instead of P11D.
• Taxable vs. Non-Taxable: Distinction is key for compliance.

End of Tax Year Procedures

• Final FPS by 5 April.
• P60 to employees by 31 May.
• P11D (if applicable) by 6 July.

Common Employer Responsibilities & Best Practices

• Payslips: Must show gross pay, deductions, net pay.
• Starters & Leavers: P45, starter checklist.
• Statutory Payments: SSP, SMP, SPP, SAP, ShPP.
• National Minimum Wage (2025/2026): Ensure current compliance.
• Accuracy & Inspections: Maintain records and respond promptly to HMRC.

Penalties and Interest

• Late FPS/EPS filings: Points-based penalties.
• Late PAYE payments: Interest and fines.
• Inaccurate information: Risk of fines and investigations.

Glossary

• PAYE – Pay As You Earn
• Tax Code – Determines personal allowance
• NICs – National Insurance Contributions
• FPS/EPS – Real-time payroll submissions
• P60, P45, P11D – Year-end and employee forms
• SSP/SMP – Statutory payments
• RTI – Real Time Information
• Payroll Giving – Charitable deduction scheme