What is PAYE in England and Wales?

As an employer, you are responsible for paying your employees their pay. However, this is not as straightforward as handing them the agreed hourly, weekly or monthly rate of pay. Instead, where your employees meet certain conditions, you will be required to pay them through PAYE. Paying your employees through PAYE requires you to calculate and make a specific deduction to their salary before paying it to them. There are strict rules relating to this, which you must note. This article will explain what PAYE means, when you may need to use it, and how to operate it. It will also explain the types of deductions you may need to make from your employee’s salary and what to do with these.

What Does PAYE Mean?

PAYE stands for pay as you earn. It is a system run by Her Majesty’s Revenue and Customs (HMRC) for employers to operate.

It allows for collecting Income Tax and National Insurance during employment before your employees can receive their salary. An employee will have one or more tax codes that will allow for calculating tax from their earnings. If an employee’s tax code is incorrect, it is generally up to your employees to sort this out.

What Are The Rules Regarding When to Use PAYE?

As an employer, you may have to run a PAYE scheme if your employees:

• earn at least £120 per week when working for you;
• gain expenses and benefits with your work;
• receive a pension; or
• have an additional job.

What Deductions Are Included in PAYE?

When using a PAYE scheme, you will be required to deduct the following from your employee’s wage:

• tax;
• National Insurance;
• any trade union subscription;
• any court order deductions for debt repayments;
• any court order payments for child maintenance;
• any student loan repayment; or
• any pension contributions.

You can work out the amount of deductions due using payroll software. Payroll software will also work out any National Insurance contributions, which you must pay for your employee where they earn over £170 per week. 

Your employee’s wage can also include their:

• tips;
• bonuses;
• maternity pay; or
• statutory sick pay.

How to Operate PAYE

As an employer, you may ask someone else to run PAYE for you. Payroll providers can do this for your business. They may be, for example, an accountant. They may simply run the payroll or offer more support, such as printing wage slips and paying HMRC on your behalf. Whilst they may be running PAYE for you, it is still your responsibility as an employer to collect and keep the records.

However, you may decide to operate PAYE yourself by using payroll software. If so, you will need to register with HMRC and give them details about your employees. Regardless of which you choose, you remain legally responsible for all PAYE tasks as an employer.

What Does an Employer Do With PAYE Deductions?

Once you have calculated the PAYE deductions, you must report and pay them to HMRC. You must report them to HMRC before or on the day of pay to your employees. Where you may qualify for a reduction by HMRC due to, for example, statutory pay, you must send a separate report with the details of this. You should also report other things to HMRC as part of your reports, such as:

• a change in your employee’s circumstances;
• a new employee joining your business; 
• where your employee reaches State Pension age; or
• where your employee has become a director.

Reporting takes place online. However, you could claim an exemption from this if, for example, you are:

• unable to use a computer due to your religion;
• you or a member of your family receive care or support; 
• you cannot access the internet; or
• you are unable to send them this way due to age or disability.

You must usually make payments to HMRC monthly. However, where you normally pay less than £1500 per month, perhaps because you are a small employer, you may be able to pay quarterly upon arrangement.

Key Takeaways

Paying your employees correctly is key to running your business efficiently and smoothly. Most employers will be required to do this through PAYE. Whilst you can ask a payroll provider to do your payroll for you and possibly assist further such as making the direct payments to HMRC, you as the employer are still legally responsible for all PAYE tasks. It is, therefore, vital that you know what should happen and what the rules are regarding PAYE.  

If you need help with understanding PAYE in England and Wales, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.

Frequently Asked Questions