What is PAYE? How the Pay As You Earn System works for UK employers

Payday might be the simplest part of payroll. By the time your employees receive their salaries, you've already done quite a bit of work behind the scenes. You've calculated gross pay, worked out income tax and National Insurance, accounted for other deductions, and prepared the information HMRC needs.

And the process doesn't end when salaries are paid. You still need to report the payroll information and pay the amount you owe to HMRC.

All of this happens through PAYE, short for Pay As You Earn.

If you're new to running payroll in the UK, terms such as PAYE, RTI, FPS, EPS, and tax codes can quickly start to feel like a lot to keep track of. But once you understand how they fit together, the process becomes much easier to follow.

Here's everything UK employers need to know about PAYE.

What is PAYE?

PAYE, or Pay As You Earn, is HMRC's system for collecting income tax and National Insurance from employees through payroll. 

When you run payroll, you calculate an employee's gross pay and work out how much needs to be deducted before they receive their net pay.

These deductions can include:

• Income tax

• Employee National Insurance contributions

• Student or postgraduate loan repayments

• Workplace pension contributions

• Other applicable deductions

As an employer, you may also have employer-side costs to account for, such as employer National Insurance contributions and certain other payroll liabilities.

The important thing to remember is that PAYE is not a tax itself. It is the system through which employment taxes and certain other deductions are collected and reported. Think of it as the mechanism that connects your payroll to HMRC.

How does PAYE work?

PAYE follows the payroll cycle. Every time you pay your employees, you calculate what they have earned, work out the deductions that apply to them, report the information to HMRC, and pay the relevant amounts.

Here's what the process generally looks like:

Employee information → Gross pay → PAYE calculations → Net pay → HMRC reporting → PAYE payment

Let's look at what happens at each stage.

 1. Collect employee information   

Before you can calculate payroll correctly, you need the right information about your employees.

For a new employee, this can include their:

• Full name and address

• National Insurance number

• Date of birth

• Start date

• Tax code or information needed to determine it

• Bank details

• Student or postgraduate loan information, where applicable

• Pension information

If a new employee gives you a P45, you use the information on it to help work out their tax code. If they don't have one, you may need to use HMRC's starter checklist. The starter checklist replaced the old P46 process.

You also need to tell HMRC about a new employee through your payroll reporting.

HMRC requires employers to register employees using a Full Payment Submission (FPS) on or before the employee's first payday.

This is one reason getting employee data right at the beginning matters. A small mistake in the information you enter can affect the tax calculation that follows.

 2. Calculate gross pay   

Next comes the part most people associate with payroll: calculating how much the employee has earned. Gross pay isn't always just basic salary. Depending on the employee and the way your business operates, it could include:

• Salary or wages

• Overtime

• Bonuses

• Commission

• Statutory payments

• Taxable benefits

• Other earnings

For example, an employee might have a monthly salary of £3,000 and receive a £500 bonus in the same pay period.

Their payroll needs to account for the additional £500 when determining their taxable pay and deductions.

This is where payroll software can take away a lot of the manual work. Instead of calculating every component separately, you can configure the employee's salary and pay components and let the system calculate the payroll based on the information you've provided.

Zoho Payroll helps UK businesses manage payroll calculations, statutory deductions, payslips, and other payroll requirements from one place. 

 3. Work out income tax using the employee's tax code   

Income tax isn't calculated in exactly the same way for every employee. The amount you deduct depends on their taxable pay and the tax code provided by HMRC.

A tax code tells you how much tax-free income an employee can have in a tax year and, consequently, how much Income Tax you need to deduct from their pay.

For example, 1257L is a common tax code for employees with a standard Personal Allowance. But not every employee will have the same tax code. Their circumstances can affect the code HMRC assigns to them, and HMRC may update it during the tax year.

So, when you run payroll, you need to make sure you're using the employee's latest tax code. An outdated tax code can result in too much or too little tax being deducted from their pay.

What happens if an employee's tax code changes?  

HMRC sends tax code notices to employers when an employee's tax code needs to be updated. You then need to use the new code in your payroll calculations from the appropriate point.

This is one of those payroll tasks that sounds simple until you're managing it for several employees, each with different circumstances. A payroll system built natively for UK compliance can help reduce the manual work involved in applying these changes and calculating the resulting deductions.

 4. Calculate National Insurance   

Income tax is only one part of the deductions you need to account for. National Insurance contributions (NICs) are another important part of the payroll calculation.

For most employees, Class 1 NICs are deducted from their pay based on how much they earn and their National Insurance category. As an employer, you may also need to pay employer NICs on top of the employee's salary.

The rates and thresholds can change from one tax year to another. For 2026/27, for example, most employees pay 8% on earnings between £1,048 and £4,189 a month, and 2% on earnings above £4,189. Different rates or rules can apply depending on the employee's circumstances and National Insurance category.

So when you're running payroll, there are really two calculations to keep track of: what you deduct from the employee's pay and what you pay as the employer.

Keeping these separate helps you calculate the employee's take-home pay correctly while also giving you a clearer picture of the actual cost of employing them.

 5. Account for other deductions   

Depending on each employees' circumstances, you may also need to account for student or postgraduate loan repayments, workplace pension contributions, and other deductions.

• Student and postgraduate loan repayments  

If HMRC tells you that an employee needs to make student or postgraduate loan repayments, these need to be deducted through payroll. The employee's loan plan and earnings determine how much you deduct.

• Workplace pension contributions  

Workplace pensions work in a similar way. If an employee is enrolled in a pension scheme, their contribution is deducted from their pay, while the employer's contribution is accounted for separately.

• Other deductions  

There may be other deductions depending on your payroll arrangements and the employee's circumstances.

This is why an employee's net pay isn't simply their gross salary minus income tax. There can be several deductions to account for before you arrive at the amount they actually receive.

Your payroll process needs to bring all of these calculations together accurately, every time you run payroll.

 6. Pay your employees   

Once you've completed the calculations, you can pay your employees their net salary. The employee receives the amount left after the applicable deductions have been made.

They should also receive a payslip showing important information such as their gross pay, deductions, and net pay.

For employees, this is usually the most visible part of the PAYE process. For the employer, though, the process isn't finished yet.

 7. Report payroll information to HMRC   

This is where Real Time Information (RTI) comes in.

RTI is HMRC's system for collecting payroll information from employers. When you run payroll, you generally need to report your employees' pay and deductions to HMRC on or before the day you pay them.

The main submission you'll deal with is the Full Payment Submission (FPS). It tells HMRC about the payments and deductions you've made for your employees.

You may also need to send an Employer Payment Summary (EPS). This is used to tell HMRC about certain adjustments or reductions to the amount you owe. For example, an EPS can be used when claiming reductions related to statutory payments. It's also used when you haven't paid any employees in a pay period and therefore have no FPS to submit.

So, when people talk about PAYE compliance, they're not talking only about calculating tax. The reporting is part of it too.

PAYE, RTI, FPS, and EPS: what's the difference?

These terms often appear together, which can make UK payroll seem more complicated than it needs to be. Here's the simple version:

Once you understand what each one does, the PAYE process becomes much easier to follow.

Pay what you owe to HMRC

After you've run payroll and reported the figures, you also need to pay the amount due to HMRC.

Your PAYE bill can include employee income tax deductions and National Insurance contributions, along with other amounts that may apply, such as student loan repayments, certain employer National Insurance liabilities, and Apprenticeship Levy payments for employers who meet the relevant threshold.

For most employers paying monthly, the PAYE bill is due to HMRC by the 22nd of the following tax month when paying electronically. If you pay quarterly, the deadline is the 22nd after the end of the quarter.

This is worth separating from the payroll reporting deadline.

You report payroll information when you pay your employees. You then pay the amount you owe HMRC according to the applicable payment deadline. Keeping those two responsibilities distinct can help prevent missed deadlines.

When do you need to register for PAYE?

The moment you're getting ready to put your first employee on payroll, PAYE registration should be on your checklist.

HMRC requires you to register as an employer if, in the current tax year, an employee:

• is paid £96 or more a week

• receives expenses or benefits

• receives a pension

• has another job

• has received Jobseeker's Allowance, Employment and Support Allowance, or Incapacity Benefit

If none of these conditions apply, you may not need to register for PAYE. You still have payroll responsibilities, though. HMRC requires you to keep records of what you pay employees and the deductions you make, along with relevant employee information, tax code notices, leave and sickness records, and any reports or payments made to HMRC. These records generally need to be kept for three years from the end of the relevant tax year.

If you do need to operate PAYE, you should register with HMRC before your first payday. You can then set up your payroll, collect the required employee information, calculate pay and deductions, and start reporting payroll information to HMRC.

What happens when you hire your first employee?  

This is generally the point where PAYE becomes a practical part of running your business.

You need to:

1. Register as an employer with HMRC

2. Collect the information you need from your employee.

3. Check whether they need to be paid through PAYE.

4. Set them up in your payroll software.

5. Work out their tax code.

6. Calculate their pay and deductions.

7. Submit the FPS to HMRC on or before payday.

8. Pay the employee.

9. Pay the amounts due to HMRC by the applicable deadline.

How to register for PAYE

Once you've determined that you need to operate PAYE, follow these steps to register as an employer with HMRC:

1. Visit the official HMRC website to register.

2. Provide your business details. During registration, HMRC will ask for information about your business, employer contact details, and the date you expect to start paying employees.

3. Once your registration is processed, HMRC will send you an Employer PAYE Reference and an Accounts Office Reference. You'll need these to run payroll and report payroll information to HMRC.

4. Choose payroll software that can record employee information, calculate pay and deductions, and submit payroll information to HMRC through Real Time Information (RTI).

5. Gather details such as the employee's National Insurance number, P45, or completed starter checklist, and determine whether student loan deductions or other payroll obligations apply.

6. Register new employees through your first Full Payment Submission (FPS), which must include their pay, deductions, tax code, and starter information.

7. Once payroll is processed, HMRC receives the employee pay and deduction information through RTI reporting.

PAYE vs Self Assessment: what's the difference?

PAYE and Self Assessment are both systems used by HMRC to collect income tax, but they work differently.

With PAYE, tax is generally deducted from employment income before the employee receives their pay.

Self Assessment is used when an individual needs to report income that isn't fully taxed through PAYE. This can apply to self-employed individuals, landlords, company directors, and people with certain other sources of untaxed income.

An employee can also have a Self Assessment obligation while being paid through PAYE. For example, someone could receive a salary through PAYE and also have income from self-employment that needs to be declared through Self Assessment.

So, PAYE doesn't necessarily mean an individual will never need to file a tax return. It simply means their employment income is taxed at source through payroll.

Why is PAYE important for employers?

PAYE matters because you're responsible for getting the payroll process right. That means:

• Accurate calculations
  Employees need to receive the right amount of pay, and the right deductions need to be made.

• Timely reporting
  Payroll information generally needs to reach HMRC on or before payday through RTI.

• Correct payments
  You need to pay the amounts due to HMRC by the applicable deadline. Late payments can result in interest and penalties.

• Good record keeping
  You need to maintain payroll records and be able to support the figures you've reported.

• Up-to-date employee information
  Changes to tax codes, starters, leavers, student loans, pensions, benefits, and statutory payments can all affect payroll.

How can payroll software simplify PAYE?

You don't need to be a payroll expert to understand the basic PAYE process. But managing every calculation, deadline, submission, and employee change manually can become difficult as your team grows.

Payroll software can automate much of the repetitive work.

With Zoho Payroll, you can manage UK payroll calculations, PAYE and National Insurance deductions, statutory payments, workplace pension requirements, payslips, and HMRC reporting from one place.

Instead of calculating each employee's deductions manually, you enter the relevant employee and salary information and let the payroll system handle the calculations.

The software can also help you maintain payroll records and keep your payroll process organised, so you can spend less time working through spreadsheets and more time running your business.

A simple PAYE checklist for UK employers

If you're setting up PAYE for the first time, here's a quick checklist to keep handy:

• Register as an employer with HMRC if you need to operate PAYE.

• Collect the required information from each employee.

• Check the employee's P45 or use the starter checklist where applicable.

• Set up the employee in your payroll system.

• Apply the correct tax code.

• Calculate gross pay, income tax, National Insurance, pension contributions, and other applicable deductions.

• Make the required statutory payments.

• Give employees their payslips.

• Submit the FPS to HMRC on or before payday.

• Submit an EPS when required.

• Pay your PAYE bill to HMRC by the applicable deadline.

• Give employees P45s when they leave.

• Provide P60s to employees still working for you at the end of the tax year.

• Report benefits using P11D where required.

• Keep your payroll records up to date.

Once these steps become part of your regular payroll routine, PAYE becomes much easier to manage.

PAYE deadlines employers should know

The exact requirements can vary depending on your circumstances, so it's always worth checking the latest HMRC guidance before acting on a deadline.

Frequently asked questions about PAYE

• What does PAYE stand for?  

PAYE stands for Pay As You Earn. It is HMRC's system for collecting income tax and National Insurance from employment income through payroll.

• What is PAYE tax?  

PAYE tax usually refers to the income tax deducted from an employee's pay through the PAYE system. The amount deducted depends on factors such as the employee's taxable pay and tax code.

• How does PAYE work for employers?  

Employers calculate employees' gross pay and applicable deductions, including income tax and National Insurance. They pay employees their net salary, report the payroll information to HMRC through RTI, and pay the amounts due to HMRC by the relevant deadline.

• Who needs to register for PAYE?  

You generally need to register as an employer if an employee meets HMRC's criteria, such as being paid £96 or more a week, receiving expenses or benefits, receiving a pension, or having another job. Employers who don't need to register may still have payroll record-keeping responsibilities.

• What is a PAYE tax code?  

A PAYE tax code tells an employer how much income tax to deduct from an employee's pay. HMRC may update an employee's tax code when their circumstances change.

• What is RTI in PAYE?  

RTI stands for Real Time Information. It is the system employers use to report employees' pay and deductions to HMRC. Employers generally need to submit their payroll information on or before the day employees are paid.

• What is an FPS in payroll?  

FPS stands for Full Payment Submission. It is the report employers send to HMRC with information about employees' payments and deductions. It generally needs to be submitted on or before payday.

• What is an EPS in payroll?  

EPS stands for Employer Payment Summary. Employers use it to report certain adjustments or reductions to the amount they owe HMRC. It can also be used to tell HMRC that no employees were paid during a pay period.

• Is PAYE the same as National Insurance?  

No. PAYE is the system used by HMRC to collect income tax and National Insurance through payroll. National Insurance is a separate contribution calculated as part of the payroll process.

• When do employers pay PAYE to HMRC?  

Most employers who pay PAYE monthly need to pay HMRC by the 22nd of the following tax month when paying electronically. Different deadlines apply to quarterly payments and payments made by cheque.

• Can payroll software manage PAYE?  

Yes. Payroll software can calculate employee pay and deductions, help manage tax and National Insurance calculations, generate payslips, and support the reporting process to HMRC. Zoho Payroll is designed to help UK businesses manage PAYE, National Insurance, statutory payments, workplace pensions, and payroll reporting from one place.

• Do employees need to file a Self Assessment tax return if they are on PAYE?  

Not necessarily. PAYE normally handles tax on employment income, but an employee may still need to file a Self Assessment return if they have other income or circumstances that require one.

• What happens when an employee joins or leaves?    

PAYE doesn't start and stop with the monthly payroll run. Employee changes also need to be reflected correctly.  

• How does PAYE affect employees? 

From an employee's perspective, PAYE makes paying income tax relatively straightforward.

They don't usually need to calculate and pay their employment income tax themselves. Their employer deducts the appropriate amount from their pay and sends the relevant information to HMRC.

Their tax code plays an important role in determining how much is deducted.

This is why an employee's tax code can have a noticeable effect on their take-home pay. If HMRC changes the code, the amount deducted through payroll may change too.

Employees can also check their tax information through their personal tax account or HMRC services if they believe their tax code or deductions are incorrect.