Introduction to PAYE
As an employer, you normally have to operate PAYE as part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.
You do not need to register for PAYE if none of your employees are paid £123 or more a week, get expenses and benefits, have another job or get a pension. However, you must keep payroll records.
Payments and deductions
When paying your employees through payroll you also need to make deductions for PAYE.
Payments to your employees
Payments to your employees include their salary or wages, as well as things like any tips or bonuses, or statutory sick or maternity pay.
Deductions from their pay
From these payments, you’ll need to deduct tax and National Insurance for most employees. Other deductions you may need to make include student loan repayments or pension contributions.
Reporting to and paying HMRC
Reporting pay and deductions
If you run payroll yourself, you’ll need to report your employees’ payments and deductions to HMRC on or before each payday.
Your payroll software will work out how much tax and National Insurance you owe, including an employer’s National Insurance contribution on each employee’s earnings above £175 a week.
You’ll need to send another report to claim any reduction on what you owe HMRC, for example for statutory pay.
You’ll be able to view what you owe HMRC, based on your reports. You then have to pay HMRC, usually every month.
If you’re a small employer that expects to pay less than £1,500 a month, you can arrange to pay quarterly – contact HMRC’s payment enquiry helpline.
Other things to report
As part of your regular reports, you should tell HMRC:
- when a new employee joins
- if an employee’s circumstances change, for example they reach State Pension age or become a director
You have to run annual reports at the end of the tax year – including telling HMRC about any expenses or benefits.
Choose how to run payroll
If you have to operate PAYE, you can choose how to run your payroll.
Choose how to run payroll
You can operate PAYE by either:
- paying a payroll provider to do it for you
- doing it yourself using payroll software
Paying a payroll provider
If you decide to pay a payroll provider (for example, a bureau or accountant) to run your payroll, you’ll need to consider how much support you’ll need.
You’re responsible for collecting and keeping records of your employee’s details. Your payroll provider will need these to run payroll for you.
Some payroll providers can offer you more support if you need it, for example keeping employee records, providing payslips and making payments to HM Revenue and Customs (HMRC).
As an employer, you’re legally responsible for completing all PAYE tasks – even if you pay someone else to do them.
Running payroll yourself
You need to complete certain tasks to set up payroll and pay your employees for the first time. This includes registering as an employer with HMRC and telling them about your employees.
Exemptions to online reporting
You may be exempt from reporting payroll online if:
- you’re prevented from using a computer on religious grounds
- you’re getting care or support services for yourself or a member of your family
- you’re unable to send reports electronically because you’re disabled, elderly or cannot access the internet
HMRC has guidance if you believe you’re exempt and would prefer to report on paper.
Setting up payroll
If you decide to run payroll yourself, you need to complete certain tasks to pay your employees for the first time. You can choose when and how often to pay your employees.
- Register as an employer with HM Revenue and Customs (HMRC) and get a login for PAYE Online.
- Choose payroll software to record employee’s details, calculate pay and deductions, and report to HMRC.
- Collect and keep records.
- Tell HMRC about your employees.
- Record pay, make deductions and report to HMRC on or before the first payday.
- Pay HMRC the tax and National Insurance you owe.
You’ll also need to complete certain annual reports and tasks to prepare for the next tax year, which starts on 6 April.
You must collect and keep records of:
- what you pay your employees and the deductions you make
- reports you make to HM Revenue and Customs (HMRC)
- payments you make to HMRC
- employee leave and sickness absences
- tax code notices
- taxable expenses or benefits
- Payroll Giving Scheme documents, including the agency contract and employee authorisation forms
Your records must show you’ve reported accurately, and you need to keep them for 3 years from the end of the tax year they relate to. HMRC may check your records to make sure you’re paying the right amount of tax.
There are different rules for keeping records to prove you have paid the correct minimum wage.
If you do not keep full records, HMRC may estimate what you have to pay and charge you a penalty of up to £3,000.
If your records are lost, stolen or destroyed
Tell HMRC as soon as possible if you do not have records and cannot replace them. You must also do your best to recreate them – HMRC may be able to help if you’re not sure how much you paid your employees.
You must tell HMRC if your final payroll report of the tax year includes figures that are:
- estimated – that you want HMRC to accept as final
- provisional – that you’ll update later with actual figures
You must follow rules on data protection if your business stores or uses personal information.