How Does PAYE Work? The UK Employer's Plain-English Guide

Every pound of Income Tax and National Insurance that every employed worker in the UK pays passes through their employer's hands first.

The employer calculates it. The employer deducts it. The employer pays it to HMRC. The employee never touches it.

That is PAYE. Pay As You Earn. The most fundamental administrative responsibility of employing people in the UK, and the one that generates the most compliance failures — not because it's complicated, but because it runs in the background until something goes wrong, and by then the problem is usually bigger than it looked.

PAYE is HMRC's system for collecting Income Tax and National Insurance from employees at source. The employer acts as the unpaid collection agent, deducting the correct amounts from each salary payment and remitting them monthly. Get it right and nothing happens. Get it wrong and the liability sits with the employer, not the employee, going back as far as HMRC decides to look.

What PAYE Actually Collects

Two deductions come out of gross pay under PAYE.

Income Tax — calculated against the employee's tax code, which reflects their personal allowance and any adjustments HMRC has instructed. The standard code for 2026/27 is 1257L, giving a personal allowance of £12,570. Earnings above that: 20% basic rate, 40% higher rate above £50,270, 45% additional rate above £125,140.

Employee National Insurance (Class 1) — 8% on earnings between the Primary Threshold (£12,570) and the Upper Earnings Limit (£50,270), then 2% above that. Nothing below the Primary Threshold — though earnings above the Lower Earnings Limit (£129 per week) still count toward state pension qualification.

Separately, the employer pays their own Class 1 NI — 15% on earnings above £5,000. This is not deducted from the employee. It is a direct employer cost on top of gross salary, paid as part of the monthly PAYE remittance.

The Tax Code — PAYE's Instruction

The tax code is what tells the payroll how much Income Tax to deduct from each specific employee. HMRC issues it. The employer applies it. The standard 1257L code means standard personal allowance, no complications.

Other codes reflect: benefits in kind that reduce the effective allowance, unpaid tax from a previous year being collected through the payroll, a second job where the full allowance is already in use elsewhere, or adjustments HMRC has made based on information the employee filed.

The employer's job is to use the correct code for each employee and update it when HMRC issues a new one. An employee on the wrong code gets under or over-deducted. Either outcome is the employer's problem to resolve.

When a new starter joins without providing a P45, the employer uses a starter declaration form to determine the starting position. Without it, the payroll runs on an emergency code — 1257L week 1 / month 1 — which doesn't accumulate personal allowance and typically over-deducts. The employee reclaims the excess from HMRC. The employer generates a query, a complaint, a delay. The starter declaration form, completed properly on day one, prevents the entire sequence.

RTI — the Reporting Layer

PAYE is the collection mechanism. RTI — Real Time Information — is the reporting layer that makes it visible to HMRC in real time.

From April 2013, every employer must submit a Full Payment Submission to HMRC on or before the date of each salary payment. The FPS reports every employee paid, their gross, their tax code, their deductions, and their year-to-date position. HMRC receives it before the money leaves the employer's bank.

If no payment is made in a month, an Employer Payment Summary goes in instead — telling HMRC the scheme is active and explaining the absence. Without one or the other, HMRC assumes the FPS is late and generates a penalty. They don't chase. They penalise.

What Goes to HMRC Each Month

The PAYE payment — due by the 19th of the following month, 22nd electronically — combines:

Income Tax deducted from all employees, plus employee NI deducted, plus employer NI on all earnings, minus any statutory payments recoverable (SMP, SPP), minus the Employment Allowance if applicable.

That net figure is the monthly PAYE liability. It reconciles against the FPS submitted. Discrepancies between what was reported and what was paid generate letters. Letters generate time. Time costs more than the discrepancy usually did.

Where PAYE Quietly Goes Wrong

None of the common PAYE failures are dramatic. They are all slow drift — a process set up correctly once, never reviewed, accumulating error.

A new starter put on emergency code six months ago, still running on it because nobody updated it when HMRC issued the correct one. An employee with two jobs where both are running the full personal allowance — the secondary job should be BR (basic rate, 20% flat), but it isn't, so HMRC reconciles the underpayment at year end and the employee owes money and blames the employer.

A director payroll calculating NI monthly rather than annually — technically wrong, producing incorrect figures every single month. Software running last year's thresholds because the April update wasn't applied.

HMRC's PAYE compliance check process exists specifically to find this kind of slow drift. They go back. They calculate the accumulated underpayment. They issue a determination. The employer pays.

bookd. runs PAYE correctly from day one — right codes, right NI categories, RTI submitted before every payday, reconciled before payment. If your current PAYE setup involves inherited software or a payroll that's been running on auto-pilot, the confidence that everything is right is worth testing before HMRC tests it for you.