PAYE stands for Pay As You Earn, which is the system used in the UK for collecting income tax and National Insurance contributions (NICs) from employees. As an employer, you are responsible for deducting the correct amount of income tax and NICs from your employees' pay and paying it to HM Revenue and Customs (HMRC) on their behalf.

Why is PAYE important?

Using the PAYE system is not only required by law, but it also helps ensure that your employees are paying the correct amount of income tax and NICs. It also helps you manage your business's finances by accurately tracking and reporting employee payroll expenses.

How to use PAYE for your business

Register with HMRC:

The first step in using PAYE is to register with HMRC. This process can be done online, and you will need to provide details such as your business name, address, and contact information. You will receive a reference number that you will need to use when submitting payroll information to HMRC. It's important to note that you must register for PAYE within three months of your first employee's payday, so it's important to do this step early on.

Gather employee information:

Before you can start using PAYE, you will need to gather some key information about your employees. This includes their full name, date of birth, National Insurance number, tax code, and gross pay. You will also need to determine the pay frequency for your employees, which can be weekly, bi-weekly, or monthly. It's important to ensure that this information is accurate, as it will be used to calculate the correct amount of tax and NICs to deduct from your employees' pay.

Calculate income tax and NICs:

Using the information you have gathered, you will need to calculate the correct amount of income tax and NICs to deduct from your employees' pay. This can be done manually, but HMRC also provides tax calculators and tables to help you do this. It's important to ensure that you are deducting the correct amount of tax and NICs, as errors can result in penalties or legal issues.

Submit payroll information to HMRC:

Once you have calculated the correct deductions, you will need to submit payroll information to HMRC. This can be done online through HMRC's website or using payroll software that is compatible with HMRC's systems. You will need to submit this information on or before each payday, and it must include details such as employee earnings, tax and NICs deductions, and any statutory payments or deductions.

Pay HMRC:

Finally, you will need to pay HMRC the amount of income tax and NICs that you have deducted from your employees' pay. This can also be done online through HMRC's website. You will typically have to pay HMRC on a monthly basis, and it's important to ensure that you are paying the correct amount on time. Failure to do so can result in penalties and interest charges.

The bottom line

It’s more important than ever to have a clear understanding of the PAYE system in the UK. Not only does it ensure that you're complying with tax regulations, but it's also a vital component of maintaining positive relationships with your employees. By ensuring that your team is paying the correct amount of income tax and NICs, you're demonstrating your commitment to their financial well-being, which in turn can improve morale and employee retention. 

And let's not forget the potential consequences of non-compliance. From hefty fines to legal disputes, the costs of getting it wrong can quickly add up. So, while it may not be the most exciting aspect of running a business, investing time and resources into understanding and implementing PAYE correctly is an essential step towards building a successful and sustainable enterprise.

Hiring contractors? Thera can save you a ton of time

If you’re hiring contractors, you’re probably spending too much time on their payroll, contracts, and tax documents. Which is why we built Thera, which saves you 90% the time you spend on contractor paperwork each month.

With Thera, you can compliantly hire your contractors in 150+ countries, onboard them in minutes, and pay them all at once (in a click). It’s global contractor payroll, finally simplified.

Sound interesting? Click here to book a demo.