How to Operate a PAYE Scheme in the UK
HM Revenue and Customs (HMRC) uses the PAYE scheme to collect Income Tax and National Insurance from employed workers. As a rule, most employers will need to operate a Pay As You Earn scheme as part of their payroll.
Another section lists 7 important things you need to do if you are an employer who is employing staff for the first time.
Note: There is no legal requirement for you to register for PAYE if you do not pay any of your employees £123 (or more) a week, none of them get expenses and benefits, have another job, or get a pension. Even so, you would still need to keep accurate payroll records (see below).
Making Payments and Deductions
As an employer, you will need to make deductions for PAYE when making payments to your employees through payroll. In most cases, payments made to employees will include:
You will also need to make certain kinds of deductions from their pay. As a rule, you will deduct tax and National Insurance (NI) for the majority of your employees. Other deductions may also include pension contributions or student loan repayments.
Note: The section on running payroll explains more about your regular payroll tasks, how to record employee pay, and how to calculate deductions (e.g. tax and National Insurance).
Reporting to HMRC (and paying)
There are several steps you need to follow when reporting pay and deductions – if you run payroll yourself. For example, you will need to report your employees’ payments, and amounts you deducted, to HMRC. You must make the report each payday (or before).
Even so, the payroll software that you use will:
- Calculate how much tax and National Insurance you owe to HM Revenue and Customs.
- Work out employer National Insurance contributions for employees who earn more than £175 per week.
You must send another report to claim a reduction on any amount that you owe to HMRC using a Full Payment Submission (e.g. to reclaim statutory payments).
Before paying HMRC, you will be able to view exactly how much you owe them – based on the reports that you created. Following that, you will need to make your payment (usually once a month).
Other Things You Must Report
Employers need to inform HMRC of a new starter as part of their regular reports. Furthermore, you would also need to notify them if any of your employees have a change in circumstances. Grounds for reporting employee changes include becoming a director of a company or reaching State Pension age.
At the end of the tax year, payroll annual reporting and tasks will be among your responsibilities. Furthermore, your obligations will include informing HM Revenue and Customs about expenses or benefits.
Note: Small scale employers (those who expect to pay less than £1,500 a month) can arrange to pay HMRC on a quarterly basis. Check the HMRC employer PAYE payment helpline for further information.
Choosing Whether to Run Payroll Yourself
Most employers need to operate Pay As You Earn (PAYE). If so, you will be able to choose how to run your payroll system, such as by:
- Doing it yourself (using recognised and accepted payroll software).
- Paying a payroll provider to operate it on your behalf.
If You Run Payroll Yourself
Setting up payroll will involve certain tasks when you pay your employees for the first time (details below). For example, you would need to register as an employer with HMRC and provide them with some information about your employees.
If You Pay a Payroll Provider
As an employer, you can choose to pay a payroll provider to run it for you (e.g. an accountant or a bureau). If so, it would be important to consider how much support they need to give you.
Even so, you would still have the responsibility of collecting details and keeping records about your employees. You would need to give this information to your payroll provider.
Some of the support that payroll providers for small business can offer, includes:
- Keeping employee records.
- Providing payslips.
- Making payments to HM Revenue and Customs (HMRC).
Note: Employers have a legal responsibility to complete all PAYE tasks. This still applies even if you are paying someone else to do them on your behalf.
Employers Exempt from Online Payroll Reporting
In some cases, you can be exempt from reporting payroll online, such as if you are:
- Getting care or support services for yourself (or for a family member).
- Prevented from using a computer on religious grounds.
- Unable to send reports by electronic means (e.g. you cannot access the internet, are disabled, or elderly).
Note: HMRC has further guidance on setting out who can report payroll on paper, instead of online, and how to apply.
How to Set Up Payroll Yourself
So, you decided to run payroll yourself and want to know the process for setting up payroll. There are several tasks you need to complete to be able to pay your employees for the first time.
- The first step is to register as an employer with HM Revenue and Customs (HMRC) and then set up a login. Another section explains PAYE Online for employers in more detail.
- Next, you need to find payroll software that records the details about your employees. The best payroll software will also help you calculate pay and deductions and report the findings to HMRC.
- Collecting and keeping records is also an important part of running payroll (see below).
- If and when it happens, you must tell HMRC about a new employee.
- The full process of running payroll includes recording pay, making deductions, and reporting the details to HMRC (no later than the first payday).
- The final step is paying HMRC any owed amounts of tax and National Insurance.
Note: Employers can choose when (and how often) to pay their employees. But, completing annual reporting and tasks is part of preparing for the next tax year (beginning on the 6th of April each year).
Keeping Payroll Records UK
As an employer, running payroll means you will need to collect and keep records of:
- The amount you pay your employees and the deductions you make.
- Reports and payments made to HM Revenue and Customs.
- Employee leave and sickness absences.
- Tax code notices. You can read more about understanding your employees’ tax codes in another section.
- Taxable expenses and benefits for employers.
- Documents relating to the Payroll Giving Scheme (including the agency contract and employee authorisation forms).
Your records need to be accurate. You must keep payroll records for a minimum of three (3) years from the end of the tax year that they relate to. HMRC might carry out tax compliance checks to ensure you are paying the correct amount of tax.
Note: HMRC can estimate your payments and charge a penalty (up to £3,000) if you fail to keep full records.
Lost, Stolen, or Destroyed Payroll Records
You must inform HMRC without delay if you cannot replace payroll records that get lost, stolen, or destroyed. You must try to recreate them or contact HMRC for help if you are unsure how much you paid your employees.
When you send your final payroll to HMRC, you must inform them if the tax year includes figures that are:
- Estimated (if you want HMRC to accept them as final).
- Provisional (if you will update them at a later date with the actual figures).
Following Data Protection Rules
You must follow the rules that relate to data protection and your business if it stores or uses personal information about your employees.
PAYE and Payroll Guide for Employers
HMRC Payroll Funding
In some cases, an employer can apply for financial help for an employee tax refund if they are unable to pay for it themselves (using their Government Gateway user ID and password).
Learn how employers can save up to £3,000 off their National Insurance bill each year by claiming the Employment Allowance.
Small Employers’ Relief
Employers can get financial help with statutory pay (e.g. reclaiming statutory payments). The amount you can claim may be as much as 103% if you qualify for Small Employers’ Relief.
HMRC Payroll Software
Do you operate a small business with less than ten (10) employees? If so, you can download HMRC PAYE tools (e.g. software and assistance) to help you calculate your employees’ payroll.
Using Payroll Online
As an employer, you can enrol and then use the PAYE Online service to send your payroll information to HM Revenue and Customs (HMRC).
Note: If you have decided to run payroll yourself, you need to have HMRC recognised payroll software so you can send reports to HM Revenue and Customs.
Performing Regular Task with Payroll
Check what you need to do once you start paying your employees. Your regular payroll tasks will include recording employee pay, calculating deductions, and giving payslips.
Employee Tax Codes Explained
As an employer, understanding employee tax codes (e.g. letters and numbers) helps you make changes and updates for the new tax year.
Fixing Problems with Payroll
Every month you have to pay HM Revenue and Customs (HMRC) what you owe as part of running payroll for your employees. Check the process for correcting errors when running payroll.
Attachment of Earnings Orders
The courts can order employers to make debt deductions from employee pay (e.g. using an AEO). Check what to do if you get a priority or non-priority order and how to make the payments.
Deduction from Earnings Orders (DEOs)
Employers sometimes need to make child maintenance deductions from an employee’s pay (e.g. using a DEO or AEO). Check how to calculate the deductions and how to make DEO payments.
Note: Employers can use a Direct Earnings Attachment (DEA) to deduct money an employee owes to the Department for Work and Pensions.
Minimum Wage Rates
Not all workers get paid by the hour. So, it is important to understand how minimum wage rates apply to different types of paid employment, such as time work, output work, and salaried hours work.
Note: Another guide explains how payroll accommodation offset rates affect the National Minimum Wage and NLW and what counts as accommodation charges.
Notify HMRC of a Company Car
There are several ways an employer can tell HMRC about an employee’s company car (e.g. car benefits made available for private use by employees or company directors).
Certificate of Election
You may need to use forms CA4139 and CF383 to run reduced rate election payroll for female employees who are married women or widowers paying less National Insurance.
Note: Female employees can continue paying a reduced rate National Insurance if they opted in before the scheme ended in 1977.
National Insurance for Directors
The help guide explains the process for working out National Insurance for company directors on annual income from salary and bonuses and how to report directors’ pay to HMRC.
End-of-Year Payroll Tasks
As an employer, payroll annual reporting and tasks will include sending a report on the previous tax year, giving employees a P60, and preparing for the new tax year.
If You Stop Employing People
You need to inform HM Revenue and Customs (HMRC) without delay if you stop being an employer. As a rule, it will mean closing your PAYE scheme (unless it is temporary).
When Employees Reach State Pension Age
Employers must update their payroll records when an employee reaches State Pension age because they stop deducting National Insurance from their pay.
Note: Employers can download the PAYE forms that they need to run payroll (e.g. P45, P46, P60, and the starter checklist) on the GOV.UK website.
What to Do When an Employee Leaves
HMRC guide explaining what employers need to do when an employee leaves a company (or retires), how to update payroll, and provide an ex-employee with a P45.
What Happens if an Employee Dies?
The help guide explains what to do if an employee dies, including how to report a workplace death to the police and then arrange final payments.
Making Payroll Payments
Paying Class 1A National Insurance
Employers need to pay Class 1A National Insurance contributions on certain types of work benefits given to their employees (e.g. a company mobile phone).
Paying Your PAYE Tax Bill
A guide for employers explains how to pay PAYE and National Insurance, the different types of payment, reference numbers, relevant bank details, and the deadlines.
Paying PAYE Late Filing Penalties
As an employer, you would get thirty (30) days to pay a PAYE late penalty notice or filing penalty to HM Revenue and Customs (unless you appeal against it).
Note: You would need to submit an employment intermediary report to HM Revenue and Customs every three (3) months if you do not operate PAYE but pay people like agency workers or subcontractors.