PAYE for UK Employers: A Plain-English Guide to Running Payroll Compliantly

What PAYE requires employers to do#

PAYE (Pay As You Earn) is the UK system through which employers collect income tax and National Insurance contributions (NICs) from employees' wages and remit them to HMRC — rather than employees paying their own tax directly. As an employer, you act as an unpaid tax collector. Your obligations: deduct income tax from each employee's gross pay using their tax code (issued by HMRC), deduct employee Class 1 NICs from gross pay above the Primary Threshold (£12,570 per year), calculate and pay employer Class 1 NICs on pay above the Secondary Threshold (£9,100 per year), and pay all deductions to HMRC by the 19th of the month following the payroll date (or 22nd for electronic payments).

Real Time Information: what you submit and when#

Since 2013, HMRC requires RTI submissions. On or before every pay date, submit a Full Payment Submission (FPS) through your payroll software — reporting each employee's name, NI number, pay, tax deducted, NIC deducted, and year-to-date figures. If you have no employees to pay in a month, submit an Employer Payment Summary (EPS). Late or missing RTI submissions attract automatic penalties: £100 per month for employers with 1-9 employees, rising with headcount. RTI submissions must be made using HMRC-compatible payroll software — there is no option to manually enter payroll on the HMRC website.

Tax codes: what they mean and how to apply them#

Every employee has a tax code issued by HMRC that determines how much income tax to deduct from their pay. The most common code is 1257L — representing the standard personal allowance of £12,570 (the L indicates the basic personal allowance). Codes with W1 or M1 (week 1/month 1 basis) are used when a new employee has not yet provided P45 information. Codes beginning with BR mean all income is taxed at basic rate (20%) — usually because the personal allowance is used on another income source. Codes starting with D mean all income is taxed at higher rate (40%). Always apply the code HMRC provides — do not attempt to calculate tax without it.

The employer NIC cost — and the Employment Allowance#

Employer Class 1 NICs are charged at 13.8% (rising to 15% from April 2025) on employee earnings above £9,100 per year. This is a significant cost: a £35,000 salary generates approximately £3,585 (13.8%) of employer NIC annually. The Employment Allowance reduces your total employer NIC liability by up to £5,000 per year. Most businesses are eligible — exceptions include single-director companies with no other employees. Claim it through your payroll software when submitting RTI. If you have not been claiming the Employment Allowance you are entitled to, you can make a retrospective claim for the previous 4 years.

Auto-enrolment: the pension obligation that comes with employment#

Every employer must automatically enrol eligible employees into a qualifying workplace pension scheme. Eligible employees are aged 22-66 earning over £10,000 per year from that employer. The minimum contribution is 8% of qualifying earnings (band between £6,240 and £50,270) — at least 3% from the employer. NEST (National Employment Savings Trust) is the government-backed scheme with no eligibility restrictions and no charge to employers. The Pensions Regulator enforces auto-enrolment with escalating penalties for non-compliance. Most payroll software integrates directly with pension providers to automate contribution calculations and submissions.