The PAYE system is used across the UK. But, what exactly is PAYE? Throughout this blog, we will explore everything you need to know about PAYE including how it works, the different tax bands and much more. Keep reading for more information!
What Does PAYE Stand for?
PAYE stands for Pay As You Earn, and the system was first introduced back in 1944. If you are an employee, you’ll typically pay your taxes and national insurance through PAYE.
PAYE is used in a wide range of industries and most of the UK is required to pay tax every month rather than all at once at the end of the tax year.
As an employer, it is your responsibility to pay PAYE and make sure all payments are sent to HMRC. Likewise, as an employee, it is your responsibility to pay your tax.
Pay as you earn refers to the income tax deducted from employees’ salaries before the income is received.
PAYE is sent straight to HMRC each time that an employee is paid so that employees won’t see the funds in their accounts. However, they may see the information on their payslips.
Meeting PAYE Deadlines
There are certain deadlines when it comes to PAYE – you need to pay the PAYE bill in full to HMRC (His Majesty Revenue and Customs) by the required deadlines.
It’s not just income tax that is paid through HMRC – it’s also PRSI (pay-related social insurance) and USC (Universal Social Charge).
It’s an effective way of ensuring that the required payments are collected on a regular and timely basis throughout the deadlines. This is a great way of preventing unwanted fines.
Most employers will implement the PAYE system into their payroll. However, if your employees earn less than £123 a week, then you won’t need to register for PAYE.
The same applies if:
- Your employees have another job
- Your employees receive a pension
- Your employees receive expenses and benefits
Despite this, you are still required to maintain payroll records.
How Does PAYE Work?
PAYE is a tax system used to collect income tax from employees’ paychecks throughout the year. Here’s how it works:
- Employer Deduction: When you start a job, your employer calculates your income tax based on your earnings and the tax code provided by HMRC.
- Tax-Free Allowance: Everyone is entitled to a tax-free allowance, which means a portion of their income is not subject to PAYE tax. This is deducted before calculating the tax owed.
- Tax Bands: Different portions of your income are taxed at different rates depending on the tax band you fall into. For example, in the UK, there are different tax bands such as basic rate, higher rate, and additional rate.
- Automatic Deductions: Your employer deducts the appropriate amount of income tax, National Insurance contributions, and any other relevant deductions from your paycheck before paying you.
- Reporting to HMRC: Employers are responsible for reporting the deductions made from employees’ pay to HMRC regularly.
- Annual Reconciliation: At the end of the tax year, HMRC accommodates the total tax paid through PAYE with the actual tax owed based on the individual’s total income and circumstances. Any overpayment or underpayment is modified accordingly.
Simply put, PAYE simplifies the process of paying income tax for employees and ensures that taxes are paid regularly throughout the year.
How is PAYE Calculated?
Simply put, PAYE is calculated based on how much you earn annually and whether you are eligible for personal allowance.
PAYE in the UK follows marginal tax rates, which means that the amount of tax your employees pay depends on their income.
The employee personal allowance for the 2023/24 tax year is £12,570 per year, which works out to £1,047.50 a month.
As an employee, you can check your PAYE tax on your P60, which should be provided to you by your employer at the end of the tax year.
There are three different types of income tax bands when it comes to PAYE. These are:
- Basic rate
- Higher rate
- Additional rate
Income | Tax Band | Percentage of Tax You Pay |
---|---|---|
Up to £12,570 | Personal allowance | 0% |
£12,571 – £50,270 | Basic rate | 20% |
£50,270 – £125,140 | Higher rate | 40% |
£125,140 and over | Additional rate | 45% |
If you’re responsible for payroll, make sure that employee earnings are verified before submitting them to HMRC.
Payroll software should automatically calculate how much National Insurance and Income Tax is owed and report payments and deductions to HMRC before each payday.
If you’re an employer in a small business paying under £1,500 per month, you can arrange to pay quarterly by contacting HMRC.
At LJS Accounting Services, we can assist with all aspects of payroll and ensure that everything runs smoothly, from reporting deductions to HMRC to comprehensive payroll management.
Check out our LJS Pay service, Payroll and CIS service to maintain straightforward payroll processes.
PAYE and Pension
PAYE is also used to collect the tax owed from pension payments. When you are paid your pension, your tax will already be deducted.
The tax will go to your state pension provider and then be forwarded to HMRC. However, many people have more than one pension provider. If you have more than one pension provider, then HMRC will ask one of them to deduct the tax from your pension.
How to Set up PAYE Payroll as an Employer
Setting up PAYE payroll involves different steps to ensure compliance with tax regulations and accurate payment of employees. Here’s a breakdown of the process:
Step 1- Register with HMRC
The first step is to register as an employer with HMRC in your country. This can be done online through the HMRC website, providing essential details about your business.
Step 2- Obtain Necessary Information
Gather information about your employees, including their:
- Full names
- Addresses
- National Insurance numbers
- Tax codes
This information is crucial for accurately calculating and deducting taxes.
Step 3- Choose a Payroll System
Select a payroll system that suits the needs of your business. This could be a manual system using spreadsheets or dedicated payroll software that automates calculations and submissions to HMRC.
Step 4- Calculate Payroll Deductions
Use the information collected to calculate the appropriate deductions from employees’ wages, including income tax, National Insurance contributions, and any other deductions such as pension contributions or student loan repayments.
Step 5- Set Up Payment Schedule
Decide how often you will pay your employees (weekly or monthly) and set up a payment schedule. Ensure that you meet all legal requirements regarding payment frequency.
Step 6- Submit Real-Time Information (RTI)
Under the RTI system, you must submit payroll information to HMRC each time you pay your employees. This includes details of wages, deductions, and taxes withheld.
Step 7- Keep Records
Maintain accurate records of payroll transactions, including payslips, tax deductions, and payments to the HMRC. These records are essential for compliance audits and employee inquiries.
Following these steps means you can effectively set up PAYE payroll for your business to ensure timely and accurate payment of employees while meeting your legal obligations.
Manage Your PAYE Payrolls With LJS Accounting Services
Here at LJS Accounting Services, we offer Payroll and CIS services to save you time and hassle and remove unnecessary worry. But what exactly do we do?
We process your payroll and deal with the HMRC so you don’t have to. This gives you the flexibility and balance you need to focus on your business whilst continuing with what you do best.
We will assign you a specific member of staff to look after you and provide excellent services. You are in charge at all times, so if at any point you decide you don’t want to continue, give us one month’s notice and we will sort this out for you.
Our payroll services offer a range of benefits, including a clear understanding of the costs and outgoings you have, so you’re in control.
For more information on the services we offer or to speak to a member of our team, don’t hesitate to contact us at 0151 601 0000. We are more than happy to help.

Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.