If your small business employs staff, it’s likely you’ll need to register under PAYE so they can pay tax to HMRC.
Read our guide to find out the PAYE meaning, how it’s calculated, and how you can incorporate it as part of your payroll.
PAYE is HMRC’s system for collecting income tax and National Insurance payments from people employed by companies.
When you make a payment to an employee, it’ll include tax deductions which are paid to HMRC via PAYE.
PAYE stands for ‘Pay As You Earn’ and has been around since the 1940s.
As an employer using PAYE, you pay your staff’s tax contributions to HMRC directly from their pay. This means when an employee receives their salary, all their deductions for tax and payments like student loan repayments have already been made.
Employers collect PAYE tax from staff wages and pay it to HMRC on a weekly or monthly basis. The PAYE tax year runs from 6 April to 5 April the following year, which is when you’ll need to complete your end-of-year PAYE return.
Every employee will have a tax code given to them by HMRC. This allows businesses using PAYE to know how much to deduct from wages.
At the start of each tax year, HMRC will send out details of every employee’s tax code. This is known as a PAYE notice of coding.
Tax codes can change – for example, when an employee gets a pay rise or stops receiving a taxable benefit such as private healthcare.
When this happens, HMRC will let you know. It’s important that you update the employee’s payroll information as soon as possible so they aren’t overpaying or underpaying tax.
There are also a number of HMRC PAYE tax forms that you may need to give to employees. These include:
You’ll sometimes need a new starter checklist from a new employee to make sure they pay the right amount of tax when you set them up on payroll.
Your new employee will need to complete a new starter checklist if they:
Make sure you collect this form from your new employee before their first payday.
The form doesn’t need to go to HMRC but you must keep the information recorded on the starter checklist for the current and next three tax years.
PAYE income tax is calculated based on how much your employee earns above the personal allowance (which is £12,570 for the 2023-24 tax year).
Here’s a breakdown of the three tax bands:
Once you have all the right information, you can use HMRC’s PAYE tax calculator to check your payroll calculations.
To get an accurate result, you’ll need your employee’s tax code and the period of pay, as well as gross pay and tax totals.
You can also use HMRC’s basic PAYE tools to help you manage your payroll.
The tools can be used alongside payroll software and help employers to:
According to HMRC, the software is only suitable for businesses with under 10 employees.
If you want to run your own payroll, you’ll need to register as an employer with HMRC and make sure you have an ERN number (also known as a PAYE reference number) for all your employees.
You’ll also need to decide on the payroll software you want to use and get a login to pay PAYE online.
Setting up a paye shceme yourself is the cheapest option, but it can be time-consuming if you don’t have experience of the PAYE system.
There are a range of rules you’ll need to follow, such as keeping three years worth of records on all employees and paying HMRC the correct amount of tax.
If HMRC asks to check your records and they aren’t comprehensive enough, they could estimate what you need to pay them (which could cost you more) and fine you up to £3,000.
The alternative to running your own payroll is paying for an accountant to do it for you.
If you go down this route, you’ll still need to keep records on your employees and share them with your accountant.
You can work with a payroll provider that manages everything for you, including issuing payslips and paying PAYE to HMRC. Or, you can work with a provider that runs your payroll based on the information you give them.
Read our guide to the best payroll software for businesses – some even include payslip templates for you.
Is there anything else you want to know about PAYE? Let us know in the comments below.
Conor Shilling is a Copywriter at Simply Business with over two years’ experience in the insurance industry. A trained journalist, Conor has worked as a professional writer for 10 years. His previous experience includes writing for several leading online property trade publications. Conor specialises in the buy-to-let market, landlords, and small business finance.
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