PAYE — Complete Guide for UK Employers
Last updated: May 2025 · 12 min read
Pay As You Earn (PAYE) is the system HMRC uses to collect income tax and National Insurance contributions (NICs) from employees at source — through their payroll. As an employer, you are responsible for deducting the right amounts and paying them over to HMRC on time.
1. What is PAYE?
PAYE means that employees receive their take-home pay after income tax and employee NICs have already been deducted. The employer then pays those deductions — plus employer NICs — to HMRC, usually monthly. This removes the need for most employees to file a self-assessment tax return for employment income.
2. Registering as an employer
You must register as an employer with HMRC before your first payday. Registration takes up to 5 working days. You will need:
- Your business name, address, and type (sole trader, partnership, limited company)
- Your Unique Taxpayer Reference (UTR) or company registration number
- The date of first payment to an employee
HMRC will issue you a PAYE reference number (e.g. 123/AB456) and an Accounts Office reference for making payments.
3. Tax codes
Tax codes tell you how much tax-free income an employee is entitled to before you deduct income tax. The most common codes for 2024/25:
| Code | Meaning |
|---|---|
| 1257L | Standard personal allowance (£12,570) — most employees |
| BR | Basic rate (20%) on all income — often for second jobs |
| D0 | Higher rate (40%) on all income |
| D1 | Additional rate (45%) on all income |
| NT | No tax deducted |
| 0T | No personal allowance — all income taxed |
| K codes | Negative allowance — where deductions exceed allowances (e.g. unpaid tax from prior year) |
New employees without a P45 should complete a Starter Checklist (formerly P46) so you can assign the correct emergency code.
4. Real Time Information (RTI)
Since 2013, PAYE operates under Real Time Information (RTI). You must report payroll to HMRC on or before each payday using your payroll software.
Key submissions:
- Full Payment Submission (FPS) — filed every time you pay an employee; includes pay amounts, tax and NI deductions, and employee details
- Employer Payment Summary (EPS) — filed by 19th if no FPS has been sent in a tax month; used to reclaim statutory pay or claim Employment Allowance
- Earlier Year Update (EYU) — to correct prior-year submissions (now replaced by an amended FPS for years from 2018/19 onwards)
Late FPS submissions attract automatic penalties: £100/month for 1–9 employees, £200 for 10–49, £300 for 50–249, £400 for 250+. There is a "lateness forgiveness" first offence in each tax year.
5. Employer National Insurance
In addition to deducting employee NICs, employers pay their own contribution on top:
| Tax year | Rate | Secondary threshold (per year) |
|---|---|---|
| 2024/25 | 13.8% | £9,100 |
| 2025/26 | 15% | £5,000 |
Employer NICs are payable on earnings above the secondary threshold. There is no upper earnings limit for the employer contribution.
Employment Allowance (£5,000 in 2024/25; £10,500 in 2025/26) can offset employer NICs for eligible employers. Claim it via an EPS at the start of each tax year.
6. NI categories
The NI category letter determines which rates apply:
| Category | Who |
|---|---|
| A | Standard — most employees |
| B | Married women/widows entitled to reduced rate (pre-1977 elections only) |
| C | Employees over State Pension age (no employee NIC, employer still pays) |
| M | Employees under 21 (employer NIC reduced to 0% up to Upper Secondary Threshold) |
| Z | Apprentices under 25 (employer NIC reduced to 0% up to Apprentice Upper Secondary Threshold) |
7. Statutory payments
Employers administer certain statutory payments through payroll:
- Statutory Sick Pay (SSP) — £116.75/week in 2024/25 for up to 28 weeks; employee must earn above the Lower Earnings Limit (£123/week)
- Statutory Maternity Pay (SMP) — 90% of average weekly earnings for first 6 weeks, then £184.03/week or 90% if lower, for up to 33 weeks
- Shared Parental Pay (ShPP) — £184.03/week or 90% of average weekly earnings if lower
- Statutory Adoption Pay (SAP) — same rates as SMP
Employers can recover most statutory payments from HMRC: small employers (annual NIC bill under £45,000) can recover 103% of SSP and SMP through their EPS. Larger employers recover 92%.
8. Payment to HMRC
You must pay PAYE deductions and employer NICs to HMRC:
- Monthly: by the 22nd of the following month (19th if paying by cheque)
- Quarterly (small employers): if your average monthly PAYE liability is less than £1,500, you can pay quarterly — by the 22nd of the month following each quarter
Interest and surcharges apply to late payments. Set up a Direct Debit via HMRC Business Tax Account to avoid missing deadlines.
9. Year-end submissions — P60 and P11D
| Document | What it is | Deadline |
|---|---|---|
| P60 | Summary of pay and tax for the year — issue to each employee still employed on 5 April | 31 May |
| P11D | Report of benefits in kind and expenses not processed through payroll | 6 July |
| P11D(b) | Class 1A NIC return on benefits reported on P11Ds | 6 July |
| Class 1A NIC payment | 13.8% employer NIC on benefit values | 22 July |
Many employers now use payrolling benefits to avoid P11Ds — HMRC allows you to process the value of most benefits through payroll in real time, removing the need for a P11D. Register with HMRC before the start of the tax year.
Frequently asked questions
When do I need to register as an employer for PAYE?
You must register as an employer with HMRC before your first payday — or before you take on your first employee. Registration typically takes up to 5 working days. You can register online via HMRC's website. Once registered you will receive a PAYE reference number and an Accounts Office reference needed for making payments to HMRC.
What is the standard tax code for 2024/25?
The standard tax code for 2024/25 is 1257L, reflecting the personal allowance of £12,570. The L suffix means the employee is entitled to the standard personal allowance. Other common codes: BR (basic rate, 20% — used for second jobs), D0 (higher rate, 40%), D1 (additional rate, 45%), NT (no tax), and K codes (where deductions exceed allowances).
What is Real Time Information (RTI) and when must I submit?
RTI is the system under which employers report payroll information to HMRC on or before each payday using a Full Payment Submission (FPS). You must submit an FPS every time you pay employees, not just monthly. If you do not make any payments in a tax month you must file an Employer Payment Summary (EPS) by the 19th. Failing to submit on time results in penalties starting at £100 per month for 1–9 employees.
Who qualifies for Employment Allowance?
Most employers can claim the Employment Allowance (£5,000 in 2024/25; £10,500 in 2025/26) to offset their employer NIC bill. You cannot claim if: (a) you are a sole director company with no other employees or directors on payroll, (b) your employer NIC bill was £100,000 or more in the previous tax year, or (c) you are a public body or business carrying out functions of a public nature. The allowance is claimed in-year through your payroll software.
What is the difference between P60 and P11D?
A P60 is an annual summary of pay and tax deducted that employers must issue to every employee still employed on 5 April, by 31 May each year. A P11D is used to report benefits in kind and expenses provided to employees or directors (e.g. company car, private health insurance) that have not been put through payroll. P11Ds must be submitted to HMRC by 6 July following the end of the tax year, and the employer must pay Class 1A NIC (13.8% in 2024/25) on the value of those benefits by 22 July.
When do I need to start paying PAYE?
You must start paying PAYE from your first payday once you have an employee earning above the Lower Earnings Limit (£123/week in 2024/25). Register as an employer with HMRC before the first payday — ideally 4 weeks beforehand. Submit a Full Payment Submission (FPS) on or before each payday and pay HMRC by the 22nd of the following month (19th by post).
What is the employer NI rate for 2024/25?
The employer National Insurance rate for 2024/25 is 13.8% on earnings above the secondary threshold of £9,100 per year. For employees under 21 and apprentices under 25, the employer NIC rate is 0% on earnings up to £50,270/year. From April 2025, the employer NI rate rises to 15% and the secondary threshold drops to £5,000/year.
How do I register as an employer with HMRC?
Register online at gov.uk/register-employer using your Government Gateway account. You will need your business name and address, UTR or company registration number, and the date of your first payment to an employee. HMRC will send a PAYE reference number and Accounts Office reference within 5 working days. You can only register up to 2 months before the first payday.
What is Real Time Information (RTI) for PAYE?
Real Time Information (RTI) is the system requiring employers to report payroll data to HMRC on or before each payday via a Full Payment Submission (FPS). Introduced in 2013, RTI replaced the old annual P35. If there are no payments in a tax month, submit an Employer Payment Summary (EPS) by the 19th. Penalties for late FPS start at £100/month for 1–9 employees.
Can sole traders have employees?
Yes. Sole traders can employ staff just like any other business structure. As a sole trader employer, you must register with HMRC for PAYE, run payroll, deduct Income Tax and National Insurance, provide employment contracts, set up auto-enrolment, and obtain Employers Liability Insurance. Your self-employment income is reported separately on Self Assessment. Having employees does not change your self-employed status.
When do I need to start paying PAYE?
You must start paying PAYE from your first payday once you have an employee earning above the Lower Earnings Limit (£123/week in 2024/25). Register as an employer with HMRC before the first payday — ideally 4 weeks beforehand. Submit an FPS on or before each payday and pay HMRC by the 22nd of the following month.
What is the employer NI rate for 2024/25?
The employer NI rate for 2024/25 is 13.8% on earnings above the secondary threshold of £9,100/year. For employees under 21 and apprentices under 25, employer NIC is 0% on earnings up to £50,270/year. From April 2025, the employer NI rate rises to 15% and the secondary threshold drops to £5,000/year — significantly increasing employer costs.
How do I register as an employer with HMRC?
Register online at gov.uk/register-employer using your Government Gateway account. You will need your business name, address, UTR or company registration number, and the date of your first payday. HMRC sends your PAYE reference number within 5 working days. You can register up to 2 months before the first payday — no earlier.
What is Real Time Information (RTI) for PAYE?
RTI requires employers to report payroll data to HMRC on or before each payday using a Full Payment Submission (FPS) via payroll software. Introduced in 2013, it replaced the old annual P35. If you have no payments in a tax month, submit an Employer Payment Summary (EPS) by the 19th. Late FPS penalties start at £100/month for 1–9 employees.
Can sole traders have employees?
Yes. Sole traders can employ staff just like any other business structure. You must register with HMRC for PAYE, run payroll, provide employment contracts, set up auto-enrolment, and obtain Employers Liability Insurance. Your self-employment income continues to be reported on Self Assessment separately. Having employees does not change your sole trader status.