PAYE in plain English
Pay As You Earn (PAYE) is HMRC’s system for collecting income tax and National Insurance from employees. Rather than each employee calculating and paying their own tax at year end, the employer does it for them on every payday — deducting the right amount, paying it to HMRC, and issuing a payslip showing what happened.
As an employer, you are a collection agent for HMRC. You are responsible for the accuracy of every deduction. If the wrong amount is deducted, the liability is yours — not the employee’s.
Tax codes: where PAYE starts
Every employee has a tax code that tells you how much of their income is tax-free in the current year. The most common is 1257L, which means the employee has a £12,570 personal allowance. You apply the tax code to calculate how much tax to deduct from each payment.
HMRC sends tax codes directly to employers through their PAYE system. New starters who cannot provide a P45 from their previous employer go onto an emergency tax code until HMRC issues the correct one. Using the wrong tax code results in the wrong deduction — either the employee pays too much tax (and must reclaim it) or too little (and HMRC eventually chases the shortfall from you).
National Insurance: the other deduction
Alongside income tax, you must deduct employee National Insurance contributions and pay employer NI contributions from your own funds. Employee NI applies to earnings above the primary threshold (£12,570 in 2026/27). Employer NI applies to earnings above the secondary threshold.
The employer NI rate is 15% on earnings above the secondary threshold following the increase in April 2025. Employment Allowance can reduce the employer NI bill by up to £10,500 per year for eligible employers — worth claiming if you have not already.
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Book a Free Check →Real Time Information: filing on every payday
Before RTI was introduced, employers sent PAYE information to HMRC annually. Under RTI, a Full Payment Submission (FPS) must be sent to HMRC on or before every payday. If you pay weekly, that is 52 submissions per year. Monthly, it is 12.
The FPS contains employee names, NI numbers, tax codes, gross pay, deductions, and year-to-date figures. HMRC uses it to track cumulative deductions and identify underpayments. Missing an FPS, or submitting one late, triggers automatic penalties.
If you pay no employees in a month, you must file an Employer Payment Summary (EPS) by the 19th to tell HMRC no payment is due. Not filing the EPS means HMRC assumes you forgot to submit the FPS and issues a default penalty.
Paying HMRC: the 19th and 22nd deadlines
Income tax and NI deducted from employees must be paid to HMRC by the 19th of each month following the tax month (22nd if paying electronically). For most small employers, this means one payment per month covering both employee deductions and employer NI contributions.
Small employers with a PAYE bill under £1,500 per month can pay quarterly. This does not affect the FPS submission requirement — you still need to submit on every payday.
Starters and leavers
New starters need to be set up in your payroll with the correct tax code before their first payment. If they have a P45 from their last employer, use the figures from Part 2. If they do not, apply the emergency code and HMRC will issue the correct code once they process the FPS.
When an employee leaves, you must issue a P45 within their final pay period. The P45 shows their year-to-date figures and tax code, which their next employer will use. An FPS marking the employee as a leaver must also be submitted to HMRC.
P60 at year end
By 31 May following the end of each tax year, every employee who was on your payroll at 5 April must receive a P60. This summarises their total pay, tax deducted, and NI contributions for the year. Employees need it to complete their own tax returns and to reclaim any overpaid tax.