Nearly 2 million UK businesses operate PAYE (Pay As You Earn) schemes, making it one of the most common ways for employers to manage employee income tax and National Insurance contributions (NICs). For the 2026/26 tax year, understanding how PAYE works is essential to ensure compliance with HMRC and to avoid costly penalties.
| Category | Threshold / Rate | Notes |
|---|---|---|
| Personal Allowance | £12,570 | Tax-free income per employee |
| Income Tax Basic Rate | 20% | On income between £12,571 and £50,270 |
| Employer NICs Threshold | £175 per week (£9,100 per year) | Above this, 13.8% NICs payable |
| Employee NICs Threshold | £125 per week (£6,500 per year) | 12% on earnings between this and £967/week |
| Secondary Class 1 NICs Rate | 13.8% | Paid by employers on employee earnings above threshold |
| RTI Submission Deadline | On or before each payday | Real Time Information must be reported each pay period |
What is PAYE and Why Do Employers Need It?
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Use Free Tax Calculator →PAYE (Pay As You Earn) is the HMRC system for collecting Income Tax and National Insurance contributions from employees' wages or occupational pensions. Employers are responsible for deducting these amounts before paying employees and submitting the details to HMRC in real time.
For UK employers, operating PAYE is a legal requirement if you have employees earning above the National Insurance lower earnings limit. Even if employees earn below this threshold or are under 16, you may still have reporting obligations.
Running PAYE correctly helps ensure your staff are taxed accurately and that your business avoids penalties. It also simplifies tax collection for HMRC by spreading payments throughout the tax year rather than in a lump sum.
Setting Up PAYE for Your Business
Before you can start deducting tax and NICs through PAYE, you must register as an employer with HMRC. This can be done online via the GOV.UK website and should be completed before you pay your first employee.
Once registered, HMRC will send you a PAYE reference number and an accounts office reference. You will also receive a set of employer payment dates and deadlines. This information is essential for submitting payroll information and paying your PAYE liabilities.
Some key things to consider when setting up PAYE include:
- Obtaining employees’ National Insurance numbers and P45s (if they have one)
- Deciding on your payroll software: HMRC provides a basic tool, but many businesses use commercial payroll software compatible with Real Time Information (RTI) submissions
- Understanding your responsibilities for workplace pension enrolment alongside PAYE deductions
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Running Payroll and Submitting Real Time Information (RTI)
HMRC requires employers to submit payroll information in real time for every pay period via the RTI system. This means you must send details of payments and deductions on or before the date you pay your employees.
To comply with RTI, your payroll software must be capable of submitting a Full Payment Submission (FPS) each pay period. This FPS report includes:
- Employee details and National Insurance numbers
- Gross pay, tax, and NICs deducted
- Student loan deductions (if applicable)
- Pension contributions
Additionally, when you hire a new employee, you must send an Employer Payment Summary (EPS) if you need to report statutory payments, apprenticeship levy, or claim Employment Allowance.
Accurate and timely RTI submissions help HMRC keep employee tax records up to date and avoid under or overpayments of tax and NICs.
Payroll Frequency and Employee Payments
There is no legal requirement for how often you pay your employees, but your payroll system must submit an FPS for every pay period, whether weekly, fortnightly, or monthly. Consistency is key to ensuring your PAYE reporting stays on track.
Many small businesses opt for monthly payroll, but if you have casual or part-time workers, weekly payments may be more appropriate. Your payroll software should be able to handle any frequency you choose.
Paying Your PAYE Bill
After you run payroll and submit your RTI reports, HMRC calculates your PAYE bill, which includes Income Tax, employee NICs deducted, and employer NICs due.
Employers must pay their PAYE liabilities monthly or quarterly, depending on their average PAYE bill:
| PAYE Bill Amount | Payment Frequency |
|---|---|
| Less than £1,500 per month | Quarterly payments |
| £1,500 or more per month | Monthly payments (by the 22nd of the following month if paying electronically) |
Payments can be made via direct debit, bank transfer, or through your payroll software if it supports HMRC payments. It’s crucial to pay on time to avoid interest and penalties.
Your Obligations as an Employer Under PAYE
Operating PAYE means adhering to several legal obligations to remain compliant and protect your employees’ rights:
- Maintain accurate payroll records: Keep detailed records of wages, deductions, and payments for at least 3 years
- Provide payslips: Give employees a payslip each pay period showing gross pay, deductions, and net pay
- Report statutory payments: Such as Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) through your payroll
- Check employee eligibility: Confirm right to work in the UK and collect necessary personal details
- Manage student loan deductions: If applicable, deduct and report student loan repayments
- Enrol eligible staff in workplace pensions: Comply with auto-enrolment duties alongside PAYE
Failing to meet these obligations can lead to penalties, enforcement actions, and damage to your business reputation.
Common PAYE Mistakes and How to Avoid Them
Many small businesses struggle initially with PAYE compliance. Here are some frequent errors to watch out for:
- Late or missing RTI submissions causing HMRC alerts
- Incorrect tax codes leading to over or underpayment of tax
- Failing to report new hires or leavers promptly
- Not paying PAYE liabilities on time, resulting in fines
- Mixing up payroll and pension auto-enrolment responsibilities
To avoid these issues, consider using HMRC-recognised payroll software and consulting guides such as our payroll software guide. Staying organised and proactive with your payroll processes will save time and reduce stress.
- Register as an employer with HMRC before paying employees and operating PAYE.
- Submit Real Time Information (RTI) to HMRC each pay period, on or before payday.
- Deduct Income Tax and National Insurance contributions accurately using current 2026/26 thresholds.
- Pay your PAYE bill on time monthly or quarterly to avoid penalties.
- Keep detailed payroll records and provide payslips to employees every pay period.
- Use HMRC-compliant payroll software to streamline PAYE management and reporting.
Do I need to operate PAYE if I only have one employee?
Yes, if you have any employees earning above the National Insurance lower earnings limit, you must operate PAYE. Even with one employee, PAYE ensures proper tax and NIC deductions. Register with HMRC before the first payment.
What happens if I miss a PAYE payment deadline?
Missing a PAYE payment deadline can result in HMRC charging interest on the late payment and imposing penalties. It’s important to pay on time and communicate with HMRC if you anticipate difficulties to avoid escalation.
Can I run PAYE payroll without specialist software?
HMRC offers a basic PAYE payroll tool suitable for very small businesses. However, most employers use commercial payroll software to handle RTI submissions, calculations, and record-keeping more efficiently. Using recognised software reduces errors and administrative burden.
Official Sources
* GOV.UK: Set up a business · * HMRC: Income Tax rates · * HMRC: Corporation Tax · * HMRC: VAT registration