This document provides an overview of PAYE (Pay As You Earn), the UK's system for collecting income tax from employee pay. It outlines an employer's responsibilities for deducting income tax and National Insurance contributions from wages. It also describes the forms and processes involved, including how to set up a payroll system, common employee tax codes, PAYE deadlines and where to find additional guidance.

1. PAYE, the basics
Table of contents
PAYE: the basics 2
Introduction 2
Employer's responsibility for PAYE 2
Getting started with PAYE 3
When to apply PAYE 4
Employee tax codes 4
PAYE forms - and when to use them 5
Where to get further information on PAYE 6
Here's how I set up a payroll system for my
business 6
Helplines 7
Related guides on businesslink.gov.uk 7
Related web sites you might find useful 8
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2. PAYE: the basics
Subjects covered in this guide
Introduction
Introduction
PAYE (Pay As You Earn) is the HM
Employer's responsibility for PAYE Revenue & Customs (HMRC) system for
collecting income tax from the pay of
Getting started with PAYE employees, including directors, as they earn
it.
When to apply PAYE
As an employer, you need to deduct income
Employee tax codes
tax and National Insurance contributions
PAYE forms - and when to use them (NICs) from your employees' pay and
submit the deductions to HMRC.
Where to get further information on PAYE
This guide explains how you deduct income
Here's how I set up a payroll system for my tax and NICs, outlining the various forms
business and processes involved.
Helplines
Related guides on businesslink.gov.uk
Employer's responsibility for PAYE
If you employ people, including any directors
Related web sites you might find useful
of a limited company, you will need to
deduct income tax and National Insurance
contributions (NICs) from their pay before
they receive it.
You can find this guide by navigating to:
As an employer, you need to know how to
Home > Taxes, returns & payroll > PAYE calculate the correct income tax deductions,
and payroll for employers > PAYE: the taking account of the various rates,
basics allowances and limits that exist. For more
information, see our section on your tax
bill, payments, deadlines, corrections
and refunds.
Payments to HMRC
By the 19th of each month - or, if you make
electronic payments, by the 22nd of each
month - you must ensure that the most
recent amounts you have deducted from all
your employees' pay has reached HM
Revenue & Customs (HMRC).
If your average monthly payments are likely
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3. PAYE: the basics
to be less than £1,500 you may be able to
pay them quarterly. Getting started with PAYE
When you first start employing people, you
If you pay too little or too late, you may incur may find it a challenge dealing with all the
interest on these amounts and/or have to forms and procedures involved in organising
pay a fine. your payroll. You will learn the parts of the
PAYE (Pay As You Earn) system that apply
Download the employer further guide to to your particular business situation in
PAYE and NICs from the HMRC website stages, as and when they apply to your
(PDF, 517K) - Opens in a new window. business.
Taxation of benefits-in-kind Setting up a payroll system
Employees and directors are also taxed on At first, many employers decide to use an
benefits in kind, such as a company car or outside supplier - usually an accountant - to
medical insurance. run their payroll for them. An experienced
accountant can tell you what systems and
As an employer you will have to pay Class forms to use, making sure you don't miss
1A NICs on such benefits. However, you do out any essential steps. See our guide on
not have to pay these contributions under how to choose and manage an
the PAYE (Pay As You Earn) system - you accountant.
do so at the year end.
Alternatively you could use a payroll agency,
See our section on expenses and benefits but remember you are still legally
for employers. responsible for any mistakes. You could
invest in a payroll software package, but it
must comply with HM Revenue & Customs
Filing PAYE returns (HMRC) standards. You can get advice on
You can manage your PAYE online using technical specifications of PAYE Online
PAYE Online for Employers. Once on the HMRC website - Opens in a new
registered, you can complete form P11D window and view a list of accredited
using either third-party software or the free payroll software products on the HMRC
HMRC Online Return & Forms - PAYE website - Opens in a new window.
product. Read about and enrol for PAYE
Online for Employers. Actions to get you started
• Contact the HMRC New Employer
Alternatively, you can download form P11D Helpline on Tel 0845 60 70 143 and
from the HMRC website (PDF, 149K) - order a New Employer Starter Pack.
Opens in a new window and make a paper The pack includes the Employer
return. CD-Rom, which can help you to
easily work out tax and National
Use our interactive tool to find out about Insurance deductions. You can view
the main online transactions you can the contents of the latest New
make with government. Employer Starter Pack on the
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4. PAYE: the basics
HMRC website - Opens in a new
Rates of income tax and National
window. Staff on the helpline will
also be able to answer any queries Insurance contributions
you may have. Note that income tax and National Insurance
• Get free confidential advice from contribution rates and thresholds may
your local HMRC Advice Team on a change from year to year. See our section
one-to-one basis at any location on your tax bill, payments, deadlines,
which suits you. Find contact corrections and refunds and our guide on
details of your local Advice Team National Insurance: the basics.
on the HMRC website - Opens in a
new window.
Employee tax codes
When to apply PAYE Each taxpayer has a personal tax code
issued to them by HM Revenue & Customs
PAYE (Pay As You Earn) is applied to all (HMRC). You will find this code on a new
cash payments an employee receives as a employee's form P45. You use the code
result of working for you, including: together with HMRC taxable pay tables to
work out how much tax to deduct from your
• salary and wages employee. You can look up taxable pay
• overtime, shift pay and tips tables on the HMRC website - Opens in a
• expense allowances and claims (this new window.
only applies where these are paid in
cash and, for expense payments, New employee without a P45
only if they fall within specific criteria
- for more details, see our guide on If a new employee doesn't have a form P45
expenses and benefits: the basics) and therefore there isn't a tax code for you
• bonuses and commission to use, they will probably need to complete a
• statutory sick pay form P46. You can do either of the following:
• statutory maternity/paternity/adoption
pay • Ask the employee to complete the
• lump-sum and compensation form themselves.
payments - some payments, eg • Complete the form for the employee
statutory redundancy payments up to by asking them for the necessary
the value of £30,000, are tax exempt information, eg by getting them to fill
in a form you created yourself or
Taxation of non-cash benefits asking for the information via email.
You do not necessarily need the
Non-cash benefits, eg childcare provision, employee's signature.
company cars and health check-ups, may or
may not be subject to PAYE deductions.
You can submit the paper version of the
form - in which case you will need the
Find out about the tax treatment of employee's signature anyway - but it's
non-cash benefits on the HM Revenue & quicker and easier to use PAYE Online for
Customs (HMRC) website - Opens in a Employers. Read about and enrol for
new window.
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5. PAYE: the basics
PAYE Online for Employers. • Form P60 - this shows the tax
deducted for the whole tax year. You
Find details of completing form P46 on must give one to each employee by
the HMRC website - Opens in a new the 31 May following the end of the
window. relevant tax year. You can order form
P60 from the HMRC Employer
Orderline on Tel 08457 646 646.
PAYE forms - and when to use Download specimen forms P14
and P60 from the HM Revenue &
them Customs (HMRC) website (PDF,
79K) - Opens in a new window.
You must keep records of wages or salary
you have paid to your employees - but also
including benefits and expenses. You must If you have 50 or more employees, you must
also use these records to give certain send all forms P45 and P46 (including P46
pay-related information to employees. (Pen) and P46 (Expat)) online. And under
government proposals all employers,
regardless of the number of employees, will
There are a number of basic forms and have to send this information online from 6
procedures you need to use to do this. April 2011.
Commonly used payroll forms for Payroll administration forms
employees
If you employ staff you need to keep a
There are three main forms to give to your record of all salary payments made,
employees, which show what income tax including NICs. You can download a
and National Insurance contributions (NICs) specimen form P11 Deductions Working
they have paid. Sheet from the HMRC website (PDF,
118K) - Opens in a new window to record
These are: these details - this can also be used as the
basis of your wages record.
• Itemised pay statements - these
are internal forms that you create To find out which forms you need to submit
and give to your employees to show at the end of the year, see our guide on how
how their pay has been calculated - to sort out your PAYE affairs for the end
see details of what a pay of the tax year.
statement must include on the
Department for Business, Read about and enrol for PAYE Online
Innovation & Skills (BIS) website - for Employers, or to find out more about
Opens in a new window. how electronic filing is being phased in for
• Form P45 - new employees who all employers, read our guide on how to file
have had a job before will bring this returns online.
to you when they start to work for
you. In turn, you give them a
completed P45 when they leave, You can also get regular reminders of
which they pass on to their new important tax dates with our tax deadline
employer. email alerts.
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6. PAYE: the basics
Where to get further information on Here's how I set up a payroll
PAYE system for my business
You can order a number of helpful guides Rebecca Alfandary
from the HMRC Employer Orderline on Tel
08457 646 646. You can also: Active Designs - Opens in a new window
Rebecca's top tips:
• download the employer's further
guide to PAYE (Pay As You Earn) • "Make use of the HM Revenue &
and National Insurance Customs website if you get stuck."
contributions (NICs) from the HM • "Get a computerised system as soon
Revenue & Customs (HMRC) as you can. It is easier to set up
website (PDF, 517K) - Opens in a while you only have a few
new window employees."
• download a step-by-step guide to • "Ask your accountant what payroll
PAYE from the HMRC website (PDF) software they recommend."
• download a catalogue of leaflets
and booklets from the HMRC Rebecca Alfandary set up her business
website (PDF) - Opens in a new Active Designs to supply educational
window, which explain the basics of equipment to primary and nursery schools in
PAYE and NICs, and include brief 1995. When the company took on its first
details of working out how much to employee Rebecca decided to save money
deduct from your employees' pay by setting up a manual, in-house payroll
system. Now that the business employs five,
Alternatively, you can find an employer's it uses a payroll software package instead.
information guide in the form of a Here, Rebecca explains how she set up her
diary/planner on the HMRC website - first payroll system and why she decided to
Opens in a new window. get it computerised.
The planner tells you about: What I did
• what forms HMRC will be sending to Contact HM Revenue & Customs
you during the tax year "Setting up a manual payroll system was
• what you have to do at important something I'd worried about and put off for
stages in the tax year as long as I could. I thought it would be
• contacts, helpline numbers and complicated with a lot of form filling, but
locations of tax offices once you know what you're doing, it is quite
• HMRC publications for employers straightforward.
• forms and information packs you can
download from the HMRC website
"I contacted HM Revenue & Customs for a
New Employer's Starter Pack, which
Any HMRC tax office will also be able to contains all the information you need to set
give you help and advice. up a payroll system. I also spoke to a couple
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7. PAYE: the basics
of HM Revenue & Customs advisers on the advent of online banking, I can transfer the
New Employer's Helpline who were very deductions and my employees' wages
helpful." directly."
Complete the right paperwork What I'd do differently
"Many of my first employees were second
jobbers, which meant they didn't have a P45 "I wish I'd invested in the payroll software
from their previous employer. I had to get sooner. I thought it would be complicated to
them to fill out a P46 and send it to HM use, but it's very simple and a great
Revenue & Customs. Our payroll just timesaver."
involves making the standard PAYE and
National Insurance contribution deductions. Read more case studies that describe
If there had been other considerations, such first hand how people tackle real-life
as student loan repayments, I might have challenges and opportunities.
considered outsourcing our payroll to an
agency.
"When you do a payroll manually you have Helplines
to use tables from HM Revenue & Customs HMRC New Employer Helpline
to work out how much to deduct. They're
daunting at first, but once you know what 0845 60 70 143
pages to use, it's easy. You basically take
the employee's gross earnings and
cross-reference them against the correct tax HMRC Employer Helpline
band. Their personal tax allowance is taken
into account automatically." 08457 143 143
Invest in a computerised system
HMRC Employer Orderline
"When we started to employ more people I
asked my accountant about alternatives to 08457 646 646
our manual system and he recommended a
well-known payroll software supplier. It cost
a couple of hundred pounds plus about
£100 a year for the support package. It's
Related guides on
pretty essential to have that as they send businesslink.gov.uk
you updates when any rates of thresholds
change, to ensure you're doing your Manage your personal list of starting-up
calculations correctly. tasks with our Business start-up
organiser | PAYE Online for Employers |
Use our interactive tool to help you
"Manually, the monthly payroll took a couple comply with the law when taking on staff
of hours and I would send the deductions off | File returns online | Use our interactive
to HM Revenue & Customs by cheque. tool to find out about the main online
Now, it takes me 30 minutes, and with the transactions you can make with
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8. PAYE: the basics
government | Your tax bill, payments,
deadlines, corrections and refunds | Employer Pack 2009 from HMRC - Opens
Operate a year-round PAYE system | Set in a new window
yourself up as an employer | National
Insurance: the basics | Expenses and Catering and service industry tips and
benefits for employers | Avoid common gratuities guidance on the HMRC website
PAYE mistakes | Choose and manage an - Opens in a new window
accountant | Outsource your payroll |
Choosing a payroll system | Expenses Non-cash benefits taxation information
and benefits: the basics | Maternity leave from HMRC - Opens in a new window
and pay | Adoption leave and pay |
Paternity leave and pay | Pay - an
overview of obligations | Get regular Taxable pay tables from HMRC - Opens
reminders of important tax dates with our in a new window
Tax deadline email alerts | Sort out your
PAYE affairs for the end of the tax year | Form P46 details from HMRC - Opens in
Manage student loans, payroll and other a new window
deductions | Business Advice Open Days
| Here's how accounting software Wage slips guidance from BIS - Opens in
brought efficiency savings to my a new window
business | Here's how I used an
accountant to help me in my business |
Maternity, paternity and adoption pay
forms from HMRC - Opens in a new
Related web sites you might find window
useful In-year forms online filing guidance from
PAYE for employers guidance from HMRC - Opens in a new window
HMRC - Opens in a new window
Advice on choosing a payroll system
Online filing benefits information from from HMRC - Opens in a new window
HMRC - Opens in a new window
PAYE booklets and leaflets from HMRC -
Download form P11D from HMRC (PDF, Opens in a new window
149K) - Opens in a new window
Download PAYE and National Insurance
contributions guidance from the HM
Revenue & Customs website (PDF, 517K)
- Opens in a new window
Free one-to-one advice from your local
Advice Team at HMRC - Opens in a new
window
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