PAYE Explained

Whenever an employee earns a salary, they must pay income tax and National Insurance on that salary to HMRC. But while self-employed workers are responsible for paying their own income tax by filling out a tax return every year and paying tax in a lump sum, salaried employees pay tax on the salary they earn as they earn it, usually on a weekly or monthly basis. This is known as Pay As You Earn taxation or PAYE.

What is PAYE?

PAYE tax is a form of taxation whereby tax is paid at the source by the employer on behalf of the employee before the employee receives their pay. It is the responsibility of all employers to make regular payments to HMRC on behalf of their employees, make any deductions that are due, and supply employees with necessary tax documents throughout the tax year.

Do I need to register for PAYE?

According to government guidelines, employers must register for PAYE if:

• They have salaried employees on their payroll

• These employees earn £123 or more per week

• Employees receive expenses or benefits such as a pension

Even if none of these applies, businesses are still legally obliged to keep payroll records, even if they do not need to register for PAYE.

PAYE tax payments and deductions explained

Every employee on the company’s payroll will receive their own tax code. This will instruct HMRC on how much tax must be deducted from their earnings. This tax code must be clearly displayed on an employee’s payslip. Tax codes issued depend on how much they earn in the tax year and may change if the employee’s circumstances change in ways that affect their income (e.g. a pay rise or promotion).

PAYE tax rates

PAYE tax rates depend on how much an employee is paid. For the 2023-2024 tax year, PAYE income tax rates are as follows:

• Employees earning £12,570 or less pay no PAYE income tax

• Earnings of £12,571-£50,270 are charged at the basic rate of 20%

• Earnings of £50,271-£150,000 are charged at the higher tax rate of 40%

• Earnings above £150,000 are charged at the additional tax rate of 45%

PAYE deductions

Employers are also responsible for making additional reductions to employee pay on top of PAYE income tax. These may include:

• student loan repayments

• pension contributions

• charitable donations requested by employees (payroll donations)

• child maintenance payments

Reporting to HMRC

As part of their PAYE obligations, employers must also make regular reports to HMRC. These must include all payments and deductions for each employee and be sent on or before every payday. Annual reports also need to be made every tax year.

Furthermore, businesses must report to HMRC when a new employee joins, or an existing employee has a change of circumstances (e.g. they reach State Pension age).

PAYE FAQs

Does an employer or an employee pay tax to HMRC?

Employers are responsible for making PAYE tax payments and deductions to HMRC on behalf of the employee.

Do I have to manage my own payroll?

Employers have a responsibility to manage PAY tax payments and deductions on behalf of their employees. However, if they do not want to manage their own payroll they can outsource this to an accountant or outsourced payroll specialist. However, employers must still keep comprehensive records and share these with their accountants. The responsibility still lies with the employer.

My company uses freelancers, do I need to register for PAYE?

Freelancers pay income tax and National Insurance annually upon filling out a tax return. If your company relies exclusively on freelance labour, you do not need to register for PAYE.