What Is PAYE?
PAYE is the system through which employers deduct income tax and National Insurance from employee wages. Learn how to run payroll compliantly.
Key Takeaways
- PAYE requires employers to deduct income tax and National Insurance from employee pay
- Employers also pay Employer's National Insurance on top of employee deductions
- Real Time Information (RTI) requires payroll submissions to HMRC on or before each pay date
- Payroll software automates most PAYE obligations — manual payroll is error-prone
What PAYE is
Pay As You Earn is the UK system through which employers collect income tax and National Insurance contributions from employees' wages and pay them directly to HMRC. Rather than employees paying tax annually in a lump sum, PAYE spreads the obligation across each pay period. Employers act as unpaid tax collectors — failure to operate PAYE correctly results in penalties for the employer.
What employers must deduct and pay
From each employee's gross pay, employers deduct income tax (using HMRC tax codes) and Employee National Insurance Contributions. Employers additionally pay Employer's National Insurance on employee earnings above the Secondary Threshold — currently 13.8%, rising to 15% from April 2025. The employer also handles student loan deductions, pension contributions, and statutory payments.
Real Time Information
Since 2013, HMRC requires employers to submit a Full Payment Submission (FPS) on or before each pay date through Real Time Information. If there are no employees to pay in a period, an Employer Payment Summary (EPS) is submitted. Missing or late RTI submissions incur penalties — £100 per month for employers with 1-9 employees, rising with headcount.
Payroll software
Operating PAYE manually is complex and error-prone. Payroll software — Xero Payroll, Sage Payroll, BrightPay, QuickBooks Payroll — automates deduction calculations, generates payslips, submits RTI filings, and calculates pension contributions. Free basic payroll software is available from HMRC's approved list for businesses with fewer than 10 employees.
Employer obligations beyond PAYE
Running PAYE creates additional obligations. Auto-enrolment requires employers to enrol eligible employees into a qualifying workplace pension. Statutory payments including Statutory Sick Pay and Statutory Maternity Pay must be paid to eligible employees. P60 annual certificates must be issued to every employee after each tax year end summarising their earnings and deductions.