1. Introduction
If you’ve just started working or running a business in the UK, you may be wondering: what is PAYE? PAYE (Pay As You Earn) is the system used by HMRC to collect Income Tax and National Insurance from employees’ wages. It ensures that taxes are deducted automatically before employees receive their pay, making it one of the most important parts of UK payroll.
2. What is PAYE?
PAYE stands for Pay As You Earn. It is the UK government’s system for collecting:
- Income Tax
- National Insurance Contributions (NICs)
- Student loan repayments (if applicable)
- Pension contributions (if applicable)
Employers deduct these directly from employees’ wages or salaries and send them to HMRC.
3. Who Needs to Use PAYE?
- Employers: Any business with staff must register for PAYE as soon as they employ someone earning over the lower earnings limit.
- Employees: PAYE applies to full-time, part-time, and temporary staff.
- Sole Traders: If you work alone, you don’t use PAYE for yourself, but you must register if you hire staff.
4. How PAYE Works
- The employee provides their P45 (from a previous employer) or completes a Starter Checklist.
- HMRC issues a tax code to the employer.
- The employer calculates deductions (tax, NICs, etc.) each payday.
- Net pay (take-home pay) is paid to the employee.
- Deductions are reported and paid to HMRC, usually monthly.
5. PAYE Tax Codes Explained
Tax codes tell employers how much tax to deduct. For example:
- 1257L – The standard tax code for most employees, meaning they get the personal allowance of £12,570 (2024/25).
- BR – Basic rate (20%) with no allowance, often used for second jobs.
- 0T – No personal allowance applied, usually if tax details are missing.
6. Benefits of PAYE
- For Employees: Taxes are deducted automatically, reducing the need for annual tax returns.
- For Employers: Ensures compliance with HMRC rules.
- For HMRC: Guarantees steady and timely tax collection.
7. PAYE Deadlines for Employers
- Monthly PAYE submissions must be made to HMRC on or before payday (RTI – Real Time Information).
- PAYE payments are due by the 22nd of the following month if paying electronically, or the 19th if paying by post.
8. Common PAYE Mistakes to Avoid
- Using the wrong tax code
- Missing HMRC reporting deadlines
- Failing to register for PAYE before paying staff
- Incorrectly calculating National Insurance contributions
9. Alternatives to PAYE
Some people do not use PAYE and instead pay tax through:
- Self-Assessment: Sole traders and freelancers handle taxes directly.
- Construction Industry Scheme (CIS): Used in the building industry.
Frequently Asked Questions
Q1: What is PAYE in simple terms?
PAYE is the UK system where employers deduct tax and National Insurance from employees’ wages before paying them.
Q2: Do self-employed people use PAYE?
No, they use Self-Assessment to pay taxes directly to HMRC.
Q3: How do I know if I’m on PAYE?
If your payslip shows deductions for Income Tax and NICs, you are on PAYE.
Q4: What happens if PAYE is calculated wrong?
HMRC may issue a refund or require additional tax payment, depending on the error.
Q5: Can PAYE apply to pensions?
Yes, pensions can also be taxed under the PAYE system.
Q6: Do small businesses have to use PAYE?
Yes, if they employ staff earning above the lower earnings threshold.
Conclusion
So, what is PAYE? It’s the UK’s Pay As You Earn system that makes tax collection simple and automatic for employees and employers. By ensuring the right amount of tax is deducted at the right time, PAYE helps businesses stay compliant and gives employees peace of mind.