The moment you take on your first employee, you become responsible for operating PAYE — Pay As You Earn. It’s HMRC’s system for collecting income tax and National Insurance from wages. Here’s how it works.
How PAYE Works
As an employer, you calculate and deduct income tax and National Insurance from employees’ gross pay each pay period. You pay the deducted amount to HMRC, plus your employer’s NI contributions. You then pay the net amount to your employee.
💡 Key takeaway
PAYE must be set up before your first employee starts — running payroll without registration exposes you to backdated penalties and interest.
Registering as an Employer
Register with HMRC as an employer before your first payday — registration can take up to 2 weeks. You’ll receive a PAYE reference number. You’ll also need payroll software that supports Real Time Information (RTI) submissions.
👤 PAYE (Employee)
- Tax deducted at source
- Employer pays 13.8% NI
- Fixed salary protected by law
- Statutory sick and holiday pay applies
- RTI submission every payday
🔧 Self-Employed (Contractor)
- Contractor handles their own tax
- No employer NI to pay
- IR35 rules must be checked
- No employment rights
- Invoice-based relationship
National Insurance Contributions
Both employees and employers pay National Insurance. Employees pay 12% on earnings between the Primary Threshold (£12,570/year) and the Upper Earnings Limit, and 2% above. Employers pay 15% on earnings above the Secondary Threshold (£5,000/year for 2026/27).
Employer’s Allowance
Most small employers can claim the Employment Allowance — reducing their employer’s NI bill by up to £10,500 per year (2026/27). This significantly reduces the cost of employment for small businesses.
Payslips and Record-Keeping
All employees must receive a payslip on or before payday. You must keep payroll records for 3 years after the end of the tax year they relate to. RTI submissions must be made on or before every payday — late submissions attract automatic penalties.
Frequently Asked Questions
What is the Employment Allowance?
A reduction of up to £10,500 in your employer’s National Insurance bill, available to most businesses. Sole-director companies where the director is the only employee cannot usually claim it.
When must I submit RTI returns?
On or before each payday — not monthly. Each Full Payment Submission must be filed before or on the date of payment.
Can my bookkeeper run my payroll?
Yes — payroll is a standard bookkeeping service. Your bookkeeper handles all calculations, payslips, RTI submissions and pension management.
