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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.

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.

When do I need to register for PAYE?

How do I set up PAYE?

There are six key steps to take to get your payroll fully set up:
    Register as an employerChoose a payroll systemTell HMRC about your employeesKeep accurate recordsRecord pay, make deductions and report to HMRC on or before the first paydayPay 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

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.
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 PAYEGet 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 loanAdd your new employee to your payroll softwareRegister your employee with HMRC using a Full Payment Submission (FPS)

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:
BandTaxable incomeTax rate
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £50,27020%
Higher rate£50,271 to £150,00040%
Additional rate£150,000+45%
If you’re in Scotland, the tax brackets look slightly different:
BandTaxable incomeTax rate
Personal Allowance£0 to £12,5700%
Starter rate£12,571 to £14,66719%
Basic rate£14,668 to £25,29620%
Intermediate rate£25,297 to £43,66221%
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 expensesTax is already being paid through PAYE, either as an employee or by receiving pensionThe 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 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 payPayment method
Same or next dayOnline or telephone banking (Faster Payments), CHAPS or through online bank account
3 working daysDebit or corporate credit card online, Bacs, at bank or building society (cash or cheque), Direct Debit, by cheque in post
5 working daysDirect 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 deductionsClass 1 and 1B National Insurance Contributions (NICs)Class 1A NICs on termination awards and sporting testimonialsStudent Loan repaymentsConstruction Industry Scheme (CIS) deductionsApprenticeship Levy payments (starting from April 2017) if you, or employers you’re connected to, have an annual pay bill of more than £3m