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What does PAYE mean?

July 28, 2021This 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.

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.

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: The Income Tax bands look slightly different in Scotland:

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?

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

On this summary, you'll need to include everyone on your payroll, including those on less than £123 a week and, as a result, aren't paid through PAYE.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 your PAYE bill payment is late, you could be charged a late payment penalty. The first missed payment won't count as a default, but any missed payments beyond that will result in interest being added to your outstanding bill every day from the original due date to the date the amount is paid in full.<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.If you haven't paid your bill in full after 6 months, you'll be charged an additional 5% on top of the unpaid amounts, with a further 5% applied if you haven't paid after 12 months.

What's included in my PAYE bill?

Your PAYE bill may include the following:

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.