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1. What is PAYE?

2. How do I set up PAYE?

3. How is PAYE calculated?

4. When do I need to pay my PAYE bill?

The Small Business Owner’s Guide to PAYE

February 25, 2022

Whether you’re expanding your first limited company start-up or need an extra hand with your sole trader business, hiring your first employee is a huge leap forward.However, as you welcome your newest team member aboard, you’ll want to make sure you have the measures in place to get them paid on time. Not only is this a legal obligation for you as a business owner, but it’s also a surefire way to avoid getting on the wrong side of your newly assembled team.In this guide, we’ll be covering the fundamentals of PAYE, from what it is and how it’s calculated, to what you need to do to get your people paid on time.

What is PAYE?

Established in 1944, PAYE (Pay As You Earn) is the system used by HM Revenue and Customs (HMRC) to collect Income Tax and National Insurance from employed workers.

With PAYE in place, whenever you run payroll the tax owed by your employees is deducted ‘at source’ from the employees’ pay packets and sent directly to HMRC. The amount left over is subsequently what’s paid to the employee as their take-home amount, with the total amount deducted displayed on their paycheck.

When do I need to register for PAYE?

You won’t need to register for PAYE if none of your employees are paid more than £120 a week, get expenses and benefits, have another job or get a pension. You will, however, need to keep payroll records.

How do I set up PAYE?

There are six key steps to take to get your payroll fully set up:

Choose a payroll system

Tell HMRC about your employees

Keep accurate records

Record pay, make deductions and report to HMRC on or before the first payday

Pay HMRC the tax and National Insurance you owe

Registering as an employer

If you’re a director of a limited company, you’ll need to do this step when setting up your business, even if you’re only employing yourself. However, if you’re a sole trader you’ll only need to worry about this when you start to bring employees on.You must register before your first payday, allowing at least 5 working days to get your PAYE reference number, otherwise known as your ‘Employer Reference Number’ or ERN.

You can register as an employer over at gov.uk.

Choosing a payroll system

There are two approaches you can take to setting up your PAYE system — either by running your payroll yourself, or enlisting a payroll provider to do it for you.While running your own payroll might seem like a best option at first, with other obligations you might find getting your people paid ends up being a time-consuming process. Not only does this involve rigorous record-keeping, but if you make a mistake you could be faced with a penalty up to £3,000.

Alternatively, you could team up with a trusted tax app to run your payroll for you. With Ember, not only can you automate your payroll and send your Real-Time Information (RTI) off to HMRC in a couple of clicks, but we’ll also store all your important records for you, making sure you stay in HMRC’s good books.

Telling HMRC about your employees

Before your new addition’s first payday, you’ll need to complete the following steps:

Check you need to pay them through PAYE

Get employee information to work out your employee's tax code, using either a P45 or ‘starter checklist’

Find out if they need to repay a student loan

Add your new employee to your payroll software

PAYE records to keep

The records you’ll need to keep for PAYE as an employer are as follows:

What you pay your employees (gross pay) and the deductions you make (net pay) Any reports or payments made to HMRC Employee leave and sickness absences Tax code notices Taxable expenses or benefits Payroll Giving Scheme documents

As mentioned above, you’ll need to hold on to these records for 3 years from the end of the tax year associated. If you do not keep full, accurate records, HMRC may estimate the amount of tax you actually owe and charge you a penalty of up to £3,000.

How is PAYE calculated?

PAYE is determined by two key factors — the amount you earn and whether or not you’re eligible for Personal Allowance.Your Personal Allowance is the amount you can earn before being taxed, and varies from year to year. Once you’re earning above this threshold, the amount you pay in Income Tax is determined by the tax bracket you fall under:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £150,000	40%
Additional rate	£150,000+	45%

If you’re in Scotland, the tax brackets look slightly different:

Band	Taxable income	Tax rate
Personal Allowance	£0 to £12,570	0%
Starter rate	£12,571 to £14,667	19%
Basic rate	£14,668 to £25,296	20%
Intermediate rate	£25,297 to £43,662	21%
Higher rate	£43,663 to £150,000
Top rate	£150,000+	46%

It’s worth noting that for every £2 over £100,000 you earn, your Personal Allowance decreases by £1, and can eventually be reduced to zero.

Your employees can find out how much Personal Allowance they are entitled to by having a look at their tax code, which can be found on their payslips. For instance, the tax code 1275L — one of the most common tax codes in the UK — indicates that the employee has a Personal Allowance of £12,570, the Personal Allowance set for the tax year 2021/22. For more on tax codes, check out our article ‘Do I have a tax code if I’m self-employed?’.

Can sole traders pay their taxes through PAYE?

While sole traders typically pay their Income Tax when submitting their Self Assessment tax return, if they are running their sole trader business alongside a full-time or part-time job, they may be able to pay the Income Tax due on their sole trader earnings through PAYE.To do this, the following criteria must apply:

The Self Assessment tax bill is less than £3,000 after expenses

Tax is already being paid through PAYE, either as an employee or by receiving pension

The tax return has been filed online by 30th December, or on paper by 31st October

When do I need to pay my PAYE bill?

When you set up PAYE, you will be expected to pay your PAYE bill on a monthly basis. If you usually pay less than £1,500 per month, you may be able to pay quarterly instead, and can contact the HMRC’s PAYE helplineIf you opt to pay monthly, you must make sure you’ve paid your PAYE bill to HMRC by the 22nd of the following month.If you pay quarterly, you must pay by the 22nd after the end of the quarter — for example, by the 22nd July for the 6th April to 5th July quarter.

How do I pay my PAYE bill?

You can pay your PAYE bill in one of the following ways:

Time to pay	Payment method
Same or next day	Online or telephone banking (Faster Payments), CHAPS or through online bank account
3 working days	Debit or corporate credit card online, Bacs, at bank or building society (cash or cheque), Direct Debit, by cheque in post
5 working days	Direct debit (if you haven't set up a direct debit before)

You can no longer pay your PAYE bill at the Post Office.

What’s included in my PAYE bill?

Your PAYE bill may include:

Employee Income Tax deductions

Class 1 and 1B National Insurance Contributions (NICs)

Class 1A NICs on termination awards and sporting testimonials

Student Loan repayments

Construction Industry Scheme (CIS) deductions

Apprenticeship Levy payments (starting from April 2017) if you, or employers you’re connected to, have an annual pay bill of more than £3m

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