What is PAYE?

Pay As You Earn (PAYE) is HM Revenue & Customs (HMRC)’s system for collecting income tax and National Insurance contributions.

Your responsibilities as an employer

As an employer you’re legally responsible for operating PAYE and completing all tasks to do with it – even if you employ someone else to do them.

1

Collecting and keeping details of all your employees

2

Telling HMRC about your employees

3

Reporting payments and deductions to HMRC

4

Paying the tax and National Insurance across to HMRC

5

Keeping accurate records for at least three years

To use PAYE you must be registered as an employer with HM Revenue & Customs (HMRC). When you register, HMRC will give you an employer PAYE reference number.

Register here
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Running your payroll

You can run the payroll yourself using your payroll software or employ a payroll provider to do it for you, depending on the size of your business and the resources you have. Whichever method you choose, you’ll need to collect and keep details of all your employees.

NOW: Pensions operates a net pay scheme where pension contributions come out of employees’ pay before income tax is taken off. You’ll need to make sure your system is set up to calculate pension contributions on your employees’ gross (before tax) pay.

This means taxpayers automatically get full tax relief – they don’t pay any income tax on their pension contributions.

How does tax relief work?

Reporting your employees' payments

If you run your payroll yourself you’ll need to report your employees’ payments, along with the deductions for income tax and National Insurance, to HMRC on or before each payday. If you use a payroll provider, they’ll do this for you.

Reporting to HMRC

Step 1

You send a Full Payment Submission (FPS) to report payments to employees and deductions from their pay.

Step 2

You also use the FPS to give HMRC details of a new employee the first time you pay them.

Step 3

You send an Employer Payment Summary (EPS) if you are claiming any payments back, such as some types of statutory pay.

Step 4

You also need to send an EPS if you haven’t paid any employees in a tax month.

Paying HMRC

You need to pay the tax and deductions you’ve reported in your FPS (minus any deductions from your EPS) each month.

If the amount you normally pay is less than £1,500 a month, you may be able to pay quarterly rather than monthly. Contact HMRC to find out more.

The deadlines for sending your payments to HMRC are:

  • the 22nd of the month following your FPS (if you pay monthly) or the 19th if you pay by post
  • the 22nd of the month after the end of the quarter (if you pay quarterly).

You may have to pay a penalty if you miss the deadline. The table below shows how long different payment methods take.

Payment speed Method
Same or next day Faster Payment through online or telephone banking

CHAPS payment

Three working days Direct debit if already set up

BACs transfer

Debit or credit card online

Cash or cheque at a bank or building society (will need payment booklet from HMRC)

Cheque through the post

Five working days Direct debit if setting one up for the first time

 

What are BACS, CHAPS and Faster Payments?
BACS (Bankers’ Automated Clearing Services) Bank-to-bank transfers that take three days to clear. The most widely used system by UK businesses for direct debits and other payments. Usually free of charge.
CHAPS (Clearing House Automated System) Bank-to-bank transfers guaranteed to arrive on the same working day as long as payment is arranged by 3pm. Usually used for payments over £10,000 due to cost to payer of £25-£35 per payment.
Faster Payments Made online or by telephone banking between two organisations that both use Faster Payments. Normally arrive within two hours. Free of charge.

Keeping records

You need to keep records of:

  • payments to employees
  • reports and payments to HMRC
  • employees’ leave and sickness absence
  • tax code notices
  • any taxable benefits you give your employees, or expenses you reimburse (such as travel expenses)
  • if any of your employees use the Payroll Giving Scheme, the agency contract and employee authorisation forms.

You need to keep the records for at least three years from the end of the tax year they relate to. HMRC may check your records to make sure the tax payments you’re making are correct.