• PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect income tax and national insurance contributions (NICs) from employees’ pay as they earn it.
• Register before your first payday, up to a maximum of two months before you pay anyone (that includes yourself).
• You use the employee’s tax code and national insurance category letter to work out how much Income Tax and NICs to deduct from their pay and how much Employer’s Class 1 NICs you owe on their earnings.
• As an employer you have a legal obligation to operate PAYE on the payments you make to your employees if their earnings reach the National Insurance Lower Earnings Limit (LEL).
• PAYE is applied to all the payments that an employee receives as a result of working for you.

PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect income tax, national insurance contributions (NICs) and pension contributions from employees’ pay as they earn it. The term ’employee’ in this guide includes directors of limited companies.

As an employer, you’ll have to deduct tax and NICs from your employees’ pay each pay period and pay Employer’s Class 1 NICs if they earn above a certain threshold. You pay these amounts to HMRC monthly or quarterly. If you don’t send the correct amount, or if you send it in late, you may have to pay interest. At the end of the tax year – and no later than 19 May – you must send HMRC a final Full Payment Submission (FPS) on or before your employees’ last payday of that tax year. Almost all employers are required to send their returns online.

This guide gives a basic overview of what you need to do to operate PAYE including which forms you’ll need and key dates.

How to register for PAYE with HMRC

Register before your first payday, up to a maximum of two months before you pay anyone (that includes yourself).

As for the registration itself, check if you can register online first through this link. You’ll most likely be able to. If you’ve already done it, skip this step. From here, sign into your government gateway account so that you can access the PAYE registration service.

You should have the following info to hand:

• Your company name
• The trading name of the business
• Company registration number
• Type of business
• When you want payroll to start

HMRC will send you a code by post within 10 days which you must activate within 28 days or you’ll have to enrol for PAYE again.

Employers’ responsibility for PAYE

As an employer you have a legal obligation to operate PAYE on the payments you make to your employees if their earnings reach the National Insurance Lower Earnings Limit (LEL). For the tax year 2026/27, this is £129 a week or £559 a month.

You use the employee’s tax code and national insurance category letter to work out how much Income Tax and NICs to deduct from their pay and how much Employer’s Class 1 NICs you owe on their earnings. By the 22nd of each following month – or by the 19th if you pay by cheque – HMRC must have received the amounts owed for the tax month ended. You may be able to send the amounts due every quarter if your average monthly payments are likely to be less than £1,500.

What payments do PAYE apply to?

PAYE is applied to all the payments that an employee receives as a result of working for you, including:

• Salary and wages
• Overtime, shift pay and tips – unless these are paid directly to your employee or they come out of an independent ‘tronc’
• Bonuses and commission
• Certain expenses allowances paid in cash
• Statutory sick pay
• Statutory maternity, paternity or adoption pay
• Lump sum and compensation payments – like redundancy payments – unless they’re exempt from tax
• Non-cash items like vouchers, shares or premium bonds – you apply PAYE to the cash value of items like this

Different tax and NICs procedures apply to expenses and benefits – such as company cars or medical insurance – that you provide to your employees. In certain cases you’ll have to operate PAYE on the value of an expense or benefit in the same way as for the various payment types listed above. But more typically you’ll need to report the expenses or benefits you’ve provided to HMRC at the end of the tax year and make a one-off payment of Class 1A NICs on the value of some of them.

Other deductions under PAYE

As well as deducting income tax and NICs from your employees’ pay each pay period, you might also use the PAYE system to deduct other items, like:

• Student loan repayments
• Employees’ pension contributions
• Payments under an attachment of earnings order
• Repayment of a loan you’ve made to an employee

Though auto-enrolment isn’t included in PAYE, it runs alongside it, especially if you use payroll software. Your auto-enrolment obligations start as soon as your staff member begins employment, whether your business is on PAYE yet or not. For the 2026/27 tax year, there’s a minimum of 5% for employee contributions and a minimum of 3% for employer contributions, totalling 8% contributions from an employee’s pay.

Pay statements

You’ll have to give each of your employees a pay statement, or payslip, at or before the time that you pay them. This can be in either paper or electronic format but it must show certain items, including each employee’s gross pay (before any deductions are made), all deductions and the purposes for which they are made, and the net amount payable after the deductions have been made (also known as take home pay). If you don’t give your employees an itemised payslip they could complain to an employment tribunal.

At the end of each tax year you must give them a summary of their pay and deductions on a form P60. You must do this for each employee who was working for you at April 5th whose earnings reached the national insurance lower earnings limit during the tax year (this must be in paper format and must be given to the employee before June 1st following the end of the tax year).

Choosing payroll software vs outsourcing

Payroll software

With payroll software, you can manage PAYE in-house through your existing finance team. They input the data and the software does the necessary calculations. As it’s kept in-house, it’s easier to make changes to information without having to contact an external provider. These changes could be employees leaving or starting as well as salary changes.

With Sage, you can do payroll and pay your team in one easy step. In-built reporting lets you see what your paying and to whom in real-time, plus you can retrieve and send off HMRC notices straight through Sage’s PAYE Online Service.

The following packages all include five employees and have 90% off for the first three months.

: £1.20 per month for three months; £12 per month thereafter
: £2.30 per month for three months; £23 per month thereafter
: £3.40 per month for three months; £34 per month thereafter

Employment Hero‘s payroll software automatically calculates and syncs pension payments and gets payslips sent to employees. Work with an allocated payroll partner to meet specific needs such as complex back pay calculations.

Free payroll: £0 per employee per month
Core payroll: £3 per employee per month
Managed payroll: £12 per employee per month

Every package comes with automated pay runs, automated payslip generation, multiple pay schedules, and more.

The technology that Moorepay uses is up to date with current legislation so can calculate statutory sick pay, occupational sick pay, holiday accrual and auto enrolment for you.

It integrates with other platforms, including Microsoft 365, Apple Identity Management, CV Library, Dropbox and Gmail.

Prices are bespoke so you’ll need to go through Moorepay to find the best deal for you.

HiBob has joiner, leaver and mover workflows along with an audit-ready process history, meaning you’ll never be caught out. If you work with contractors, there’s additional IR35 support. It has integrations with Slack, Zapier, Microsoft Teams, Zoom and more.

HiBob doesn’t have set pricing, so you’ll need to get a quote through the company directly.

Access offers varying flexible packages, dependent on the size of your business. You’ll get support from Access experts along with automatic back-ups. Alternatively, you could opt for a part-managed solution and have part of your payroll admin outsourced. Manage your payroll in-house using software, while outsourcing the rest to payroll specialists.

Pricing depends on business size and sector, plus the package you go for. It’s best to contact Access for a quote.

Payroll outsourcing

This could be one to consider if there are complexities in your workforce, such as employees who are based abroad. When outsourcing payroll, you hand over your details to a freelancer or a company who will crunch the numbers, send off your files and even distribute employee payslips. They will be more up to date on the nuances of payment laws, too.

For more information on managing PAYE, click here.