Becoming an employer is an exciting step, though like every stage of starting and running a business, there are some tax considerations to know about! In this article we’ll look at how PAYE works for new employers.
What is PAYE?
PAYE stands for Pay as you Earn, and is the system used by employers to deduct income tax and National Insurance (NI) directly from employees’ and directors’ wages before paying it on to HMRC.
Some people will refer to PAYE taxes, but it’s actually the mechanism for colelcting tax, rather than a tax in its own right to HMRC. The deductions made through PAYE can include things like income tax, National Insurance (NI), Student Loans repayments, and pension contributions.
Do I need to register for PAYE?
Employers should register for PAYE if any of the following apply:
- An employee earns the Secondary Threshold for National Insurance or more. The current threshold for the 2026/27 tax year is £5,000 per year (or £96 per week).
- You provide employees with benefits or taxable expenses (known as benefits in kind)
- An employee has another job or receives a pension
- You need to pay NI
The same rules will apply to absolutely any employer, even if you’re a sole trader with staff or a larger company.
The difference between payroll and PAYE
Payroll is the process of paying employees and workers for the work they have done. It involves recording data about employees so you can calculate their pay correctly, as well as working out what needs to be paid to HMRC and other bodies for things like income tax, NI contributions, and pensions. We go over some common payroll mistakes to avoid in a separate article.
PAYE is the mechanism an employer uses to report this information to HMRC, and to pass on any deductions.
Registering as an employer for PAYE
If you’re getting ready to take on your first employee, you’ll need to register as an employer before before your first payday.
You can register for PAYE online, and can either do it yourself or ask an accountant to manage PAYE registration for you. You’ll need to confirm the number of employees (including yourself), the frequency of PAYE payments to be made, and the date of the first PAYE payment.
Set up payroll
A payroll system uses the employee’s details to calculate how much PAYE will be deducted from their payslip each month. This is where hiring an accountant comes in useful. Payroll calculations can be time consuming, and confusing!
Payslips
You’ll need to provide every employee with a payslip each time you pay them, confirming what their wages are, and how much you’ve deducted.
Pay PAYE
After you have paid employees it will be necessary to pay PAYE to HMRC. This is the amount you deduct from your employees’ wages. Failure to do so will incur hefty fines from HMRC, and all sorts of uncomfortable chats with angry employees. This is an easy transaction that can be completed online.
Make sure you report everything to HMRC on or before each payday, and send any payments to them by the 22nd of the following tax month in which they happened (a tax month is 6th to the 5th each month).
Check out our accounting support hub for more help and resources, or to ask a tax question.
