If you are thinking about hiring your first employee, you will quickly come across the term PAYE, which stands for Pay As You Earn. For new employers, it can sound like a complicated system filled with technical rules. The good news is that the basic concept is very straightforward.
This guide is written to calmly explain what PAYE is, how it works, and what your responsibilities are as an employer in the UK. Understanding these fundamentals is the first step to running a payroll with confidence.
What Is PAYE?
PAYE is HM Revenue & Customs’ (HMRC) system for collecting Income Tax and National Insurance from employees’ pay. Instead of an employee receiving their full salary and then having to pay tax on it themselves, the employer deducts the tax and National Insurance before paying them.
The employer then pays these deductions over to HMRC on the employee’s behalf. It is a way of ensuring that tax is paid regularly throughout the year, directly from employment income.
Your Responsibilities as an Employer
If you employ someone, you normally have to operate a PAYE payroll. Your core responsibilities are to:
Calculate and Deduct Tax and NI
Calculate and deduct Income Tax and National Insurance from your employee’s pay each payday.
Reporting
Report these payments and deductions to HMRC on or before each payday. This is usually done using payroll software.
Pay HMRC
Pay the tax and National Insurance you have deducted (plus any employer’s National Insurance contributions) to HMRC, usually on a monthly basis.
Payslip
Provide a payslip to your employee for each pay period, showing their gross pay, deductions, and net pay.
P60
Provide a P60 to your employee at the end of the fiscal year (6th April > 5th April) which summaries and gives a break down of an employee’s earned income, and NIC and tax contributions throughout the whole fiscal tax year. This is a legal requirement as an employer and must be issued to all employees by no later than the 31st May after the end of the tax year.
P45
Provide a P45 to your employee which summarises the total income earned and tax paid in the fiscal tax year up to the date of their leaving your employment. This is a legal responsibility as an employer and must be provided to your employee. Usually issued with a employee’s last payslip.
P11D
P11D (Benefits in Kind) – If you provide company taxable benefits to your employees you will need to issue a P11D by 6th July following the end of the tax year. Benefits in kind can consist of but not limited to. Private Medical Insurance, Gym Memberships, Fuel Allowances paid by the company on the employee’s behalf, Company Cars.
When Do You Need to Register for PAYE?
You must register as an employer with HMRC and set up a PAYE scheme if you are paying any employee £96 or more a week. You also need to register if they get expenses and benefits, have another job, or are receiving a pension. In practice, almost all employers need to register for PAYE.
You should register before your first payday. It can take a few weeks to get your PAYE reference numbers from HMRC. It’s important to do this in good time.
In order to register a limited company for PAYE, you will need your company’s UTR number, companies house registration number and the directors’ national insurance numbers and personal UTR numbers.
How Is It All Calculated?
You do not have to calculate the tax and National Insurance yourself. Modern payroll software does all the heavy lifting for you. When you set up a new employee in your software, you will enter their tax code. This tells the software how much tax-free income they are entitled to.
Each time you run your payroll, the software will use the employee’s tax code and their gross pay to work out the correct deductions for Income Tax and National Insurance. It will also calculate any other deductions, such as student loan repayments or pension contributions.
What is Employer’s National Insurance?
This is a common point of confusion. As well as deducting National Insurance from your employee’s pay, you as the employer, must also pay a separate Employer’s National Insurance Contribution for each employee earning above a certain threshold. This is a direct cost to your business, on top of the employee’s salary. Your payroll software will calculate this for you automatically.
When Getting Advice Can Help
Running a payroll is a significant legal responsibility. While software makes the process much easier, you are not expected to be an expert. Getting professional advice can be very helpful to ensure you are setting up your payroll correctly, meeting all your deadlines, and complying with all your employer duties.
If you would like calm, practical support, Penney’s Accountancy works with UK small businesses in Farnborough and the surrounding areas. We offer a full payroll service, taking care of all the calculations, reporting, and compliance, so you can focus on managing your team.
Want to Learn More in Your Own Time?
For those who want to build their confidence and understand these topics in more detail, Penney’s Finance School offers an online, self-paced business and finance course. It covers everything from company setup to cash flow and tax, allowing you to learn at your own pace.
Important information
The information provided in this article is intended as general guidance for UK businesses only and reflects UK tax legislation and HMRC guidance as of February 2026.
Tax rules and business requirements can change, and individual circumstances vary. Before acting on any of the information above, we recommend speaking to a qualified accountant who can provide advice tailored to your specific situation.