PAYE, or Pay As You Earn, is the system employers use to deduct income tax and National Insurance from employees' pay and pass it to HMRC. Each payday you work out the deductions, report them to HMRC on or before the day you pay, and pay HMRC what is due by the 22nd of the following month.
The business also pays employer's National Insurance on top of salaries. That is a cost of employing people and needs to be in your budget.
Registering as an employer
You must register with HMRC as an employer before your first payday if anyone you pay:
- earns at or above the lower earnings limit, which is £6,708 a year for 2026/27
- receives benefits or a pension from you
- has another job
This includes a director who is the only person on the payroll. Registration gives you an employer PAYE reference and an Accounts Office reference for payments.
What is deducted
Income tax. Each employee has a tax code, which tells your payroll software how much tax-free pay to allow. The standard code for 2026/27 is 1257L, reflecting the £12,570 personal allowance. Tax is then charged at 20 percent up to £50,270 and 40 percent above that, with different bands in Scotland.
Employee National Insurance. 8 percent on earnings between £12,570 and £50,270 a year, and 2 percent above that.
Employer National Insurance. 15 percent on earnings above £5,000 a year. There is no employer National Insurance for employees under 21 or apprentices under 25 on earnings up to £50,270.
Payroll may also deal with student loan repayments, workplace pension contributions under auto-enrolment, and statutory payments such as sick pay and maternity pay.
A worked example for 2026/27
An employee earns £30,000 a year, paid monthly, on tax code 1257L.
- Monthly gross pay: £2,500.
- Income tax: tax-free pay is £1,047.50 a month, so tax is 20 percent of £1,452.50, which is £290.50.
- Employee National Insurance: 8 percent of £1,452.50, which is £116.20.
- Net pay to the employee: £2,093.30.
- Employer National Insurance: 15 percent of the pay above £416.67 a month, which is £312.50.
The business pays HMRC £719.20 for that month: the tax and employee National Insurance it deducted, plus its own employer's National Insurance. The total cost of employing this person is £32,500 a year, before pension contributions.
Reporting each payday
Under Real Time Information, you send a Full Payment Submission to HMRC on or before each payday. It shows what each employee was paid and what was deducted. Payroll software sends this for you.
An Employer Payment Summary is used to claim the employment allowance, to tell HMRC if you paid no one in a month, or to reclaim statutory payments. The employment allowance reduces employer's National Insurance by up to £10,500 a year, but is not available to a company where the only employee paid above £5,000 is a director.
Paying HMRC
Payment is due by the 22nd of the month after the tax month ends, if paying electronically. Tax months run from the 6th to the 5th, so deductions from pay in the month to 5 November must reach HMRC by 22 November.
If your average monthly payments to HMRC are under £1,500, you can choose to pay quarterly instead.
Late payment and late filing can lead to penalties and interest, so it is worth setting up a regular payment routine.
Year end
After 5 April, you send a final submission for the year and give each employee still with you a P60 by 31 May. Employees who leave during the year get a P45.
What to do
- Register as an employer before your first payday if any of the conditions apply.
- Use HMRC-recognised payroll software, or ask us to run payroll for you.
- Check new starters' tax codes and starter information when they join.
- Set a reminder to pay HMRC by the 22nd of each month.
- Claim the employment allowance if you are eligible.
If you would like us to take payroll off your hands, book a free call.
