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What does PAYE mean?

July 28, 2021
This article was updated on 22nd March 2023.Payday is anyone's favourite day — that is, unless you're one running payroll.As an employer, not only is running payroll and keeping payroll records a legal obligation, but it's also a crucial part of ensuring that your employees' taxes are filed to HM Revenue and Customs (HMRC) on time.
Here's where Pay As You Earn (PAYE) comes in. PAYE is HMRC's way of collecting taxes, such as Income Tax and Class 1 National Insurance contributions (NICs), from company employees.

But what does PAYE mean? In this article, we'll be exploring what PAYE means, how it's calculated and what your PAYE responsibilities as an employer are.

What does PAYE mean?

Otherwise known by its full moniker 'Pay As You Earn,' PAYE is HMRC's system used to collect Income Tax and National Insurance contributions from an employee's salary at source.
If you run your own business and have one or more employees, it's your responsibility as an employer to register for PAYE. However, if you are a self-employed sole trader, you won't need to register for PAYE — instead, you'll pay your Income Tax and NICs through your Self Assessment tax return.

How is PAYE calculated?

The total amount of tax deducted from an employee's payslip is determined by 2 factors: the employee's income and the total amount of Personal Allowance they're entitled to.An employee's Personal Allowance is the total amount they can earn before being taxed on their income. This can vary year to year, and reduces by £1 for every £2 you earn over £150,000.Once your employee's earnings have surpassed the Personal Allowance upper threshold, they'll then be charged Income Tax, with the total amount owed in tax taken as a percentage of their earnings. This percentage is determined by the tax bracket they fall into, and in England, Wales and Northern Ireland for the 2023/24 tax year are as follows:
BandTaxable incomeTax rate
Personal AllowanceUp to £12,5700%
Basic rate£12,571 to £37,70020%
Higher rate£37,701 to £125,14040%
Additional rate£125,140+45%

The Income Tax bands look slightly different in Scotland:
BandTaxable incomeScottish tax rate
Personal AllowanceUp to £12,5700%
Starter rate£12,571 to £14,73219%
Basic rate£14,733 to £25,68820%
Intermediate rate£25,689 to £43,66221%
Higher rate£43,663 to £125,14041%
Top rate£125,140+46%

You can find more on the different factors that affect your employees' payslips over at our guide to UK tax allowance, rates and thresholds for 2023/24.

Who qualifies for PAYE?

If any of your employees are earning over £123 a week, you'll need to pay them through PAYE. However, if your employees are earning less than this, they won't need to be registered for PAYE, but they must still be named on the payroll.

How do I set up PAYE?

Once you've registered as an employer, HMRC will send you a login for PAYE Online, alongside your Employer Reference Number (ERN), otherwise known as your PAYE reference number. You'll need this number to:

    Complete your end-of-year Pay As You Earn (PAYE) return If an employee needs to apply for employee tax credits or student loan Buying employers' liability insurance
From there, you can you can choose the payroll software you'll be using to record your employee's details, calculate pay and deductions, and file reports to HMRC.Once you're set up, you'll need to carry out the following payroll-related obligations:
    Collect and keeping payroll recordsTell HMRC about your employeesRecord pay, make deductions and report to HMRC on or before the first paydayPay HMRC Income Tax and National InsuranceComplete annual reports and tasks to prepare for the following tax year
The payment information you submit will be sent by a Full Payment Summary (FPS), which will break down the total amount deducted from your employee's salary in Income Tax and National Insurance. Keep in mind you'll need to send an FPS for each of your employees, so it's definitely worth investing in an accounting solution — such as Ember — that will automate your payroll and file Real Time Information (RTI) directly to HMRC for you.

You'll also need to send the FPS on or before your employees' payday, regardless of whether you pay HMRC on a quarterly or monthly basis. If you choose to pay your employees earlier than their typical payday — for example, the next payday falls on a Bank Holiday — be sure to still enter the usual payday date on your FPS.It's also worth noting that if you do pay your employees early, you can send an FPS before your regular payday. Just be cautious around sending it too early; if an employee leaves or changes their tax code, you'll need to send correct FPS with the updated changes.You'll also need to send an Employer Payment Summary (EPS) alongside your FPS if you:
    Reclaim statutory maternity, paternity, adoption, parental bereavement or shared parental paymentsClaim Employment AllowanceCan reclaim Construction Industry Scheme (CIS) deductions as a limited companyClaim National Insurance contributions holiday for previous tax years
If you're sending this off, be sure to do so by the 19th of the following tax month, giving HMRC enough time to apply any reduction — for example, statutory pay — on what you'll owe from your FPS.

When do I need to pay my PAYE bill?

You'll need to pay your PAYE bill by:
    22nd of the next tax month if you pay on a monthly basis22nd after the end of the quarter if you pay quarterly (for example, if your quarter runs from 6th April to 5th July, you'll need to pay by 22nd July)19th of the next tax month if you pay by cheque in the post
If you usually pay less than £15,000 a month, you might be able to pay quarterly instead of monthly. If this is better for your cash flow, contact the PAYE payment helpline to see if you're eligible.

To find out exactly how to pay your PAYE bill, check out our guide on how to pay your PAYE bill.

Number of defaults in a tax yearPenalty percentage applied to the amount that is late in the relevant tax month (ignoring the first late payment in the tax year)
1 to 31%
4 to 62%
7 to 93%
10 or more4%
To avoid paying any interest on your PAYE bill, you'll need to pay in full within 30 days of your penalty notice being issued.

What's included in my PAYE bill?

Your PAYE bill may include the following:
    Employee Income Tax deductions — the total amount your employees pay in Income Tax is determined by the tax rate of the tax bracket they fall under Class 1 and 1B National Insurance Class 1A National Insurance on termination awards and sporting testimonials Student Loan repayments Construction Industry Scheme (CIS) deductions Your Apprenticeship Levy payments if you, or employers you’re connected to, have an annual pay bill of more than £3 million Class 1A National Insurance paid on employee work benefits is paid separately.

I've overpaid on PAYE. Can I get a refund?

If you've overpaid on tax, you may be entitled to a tax refund. If the mistake was down to an incorrect FPS or an Employer Payment Summary (EPS), make the correction in your next regular report and HMRC will take the overpayment off your next PAYE bill.