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PAYE for Employers: How Payroll Works

PAYE stands for Pay As You Earn. The tax collection system ensures the UK Government receives the correct tax revenue from employed workers once they start earning.

The information in this section explains what steps new employers need to do for PAYE. Check whether you need to run payroll yourself, how to pay your workers for the first time, and how to keep records.

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 £118 (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:

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 tell HMRC about a new employee 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:

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:

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:

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.

  1. 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.
  2. 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.
  3. Collecting and keeping records is also an important part of running payroll (see below).
  4. If and when it happens, you must tell HMRC about a new employee.
  5. The full process of running payroll includes recording pay, making deductions, and reporting the details to HMRC (no later than the first payday).
  6. 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:

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.

Important InformationHMRC 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:

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).

Employment Allowance

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.

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.

Running Payroll

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.

Note: Employers can use a Direct Earnings Attachment (DEA) to deduct money an employee owes to the Department for Work and Pensions.

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.

Payroll Giving

Payroll Giving is a way of giving money to charity without paying tax on it. It must be paid through PAYE from someone’s wages or pension.

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.

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.

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.

Payroll for Female Employees Who Pay Less National Insurance

If a female employee gives you a ‘certificate of election’ form, she may be able to pay less National Insurance.

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.

PAYE and Payroll for Employers in the United Kingdom