PAYE for employers: the basics

PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NICs) from employees’ pay as they earn it. The term ’employee’ in this guide includes directors of limited companies.

As an employer, you’ll have to deduct tax and NICs from your employees’ pay each pay period and pay Employer’s Class 1 NICs if they earn above a certain threshold. You pay these amounts to HMRC monthly or quarterly. If you don’t send the correct amount, or if you send it in late, you may have to pay interest. After the end of the tax year you must send HMRC an Employer Annual Return (form P35 and forms P14). Almost all employers are required to file this online.

This guide gives a basic overview of what you need to do to operate PAYE including which forms you’ll need and key dates. It also provides links to detailed guidance.

Important updates and changes

The processes described here may be different after you start to send PAYE information in real time. This might be a good time for you to familiarise yourself with any changes so that you are ready to operate PAYE in real time.

Getting started with PAYE in real time on the HM Revenue & Customs website – Opens in a new window

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Employers’ responsibility for PAYE

As an employer you have a legal obligation to operate PAYE on the payments you make to your employees if their earnings reach the National Insurance Lower Earnings Limit. For the tax year 2012-13 this is £107 a week, £464 a month or £5,564 a year.

You use the employee’s tax code and National Insurance category letter to work out how much Income Tax and National Insurance contributions (NICs) to deduct from their pay and how much Employer’s Class 1 NICs you owe on their earnings. By the 19th of each month – or by the 22nd if you make electronic payments – HM Revenue & Customs (HMRC) must have received the amounts owed. You may be able to send the amounts due every quarter if your average monthly payments are likely to be less than £1,500.

What payments does PAYE apply to?

PAYE is applied to all the payments that an employee receives as a result of working for you, including:

• salary and wages
• overtime, shift pay and tips – unless these are paid directly to your employee or they come out of an independent tronc
• bonuses and commission
• certain expenses allowances paid in cash
• Statutory Sick Pay
• Statutory Maternity, Paternity or Adoption Pay
• lump sum and compensation payments – like redundancy payments – unless they’re exempt from tax
• non-cash items like vouchers, shares or premium bonds – you apply PAYE to the cash value of items like this

Rates and thresholds for employers

PAYE on expenses and benefits

Different tax and NICs procedures apply to expenses and benefits – such as company cars or medical insurance – that you provide to your employees. In certain cases you’ll have to operate PAYE on the value of an expense or benefit in the same way as for the various payment types listed above. But more typically you’ll need to report the expenses or benefits you have provided to HMRC at the end of the tax year and make a one-off payment of Class 1A NICs on the value of some of them.

Expenses and benefits for employers

Other deductions under PAYE

As well as deducting Income Tax and NICs from your employees’ pay each pay period, you might also use the PAYE system to deduct other items such as:

• student loan repayments
• employees’ pension contributions
• payments under an attachment of earnings order
• repayment of a loan you have made to an employee

Pay statements

You’ll have to give each of your employees a pay statement – or payslip – at or before the time that you pay them. This can be in either paper or electronic format but it must show certain items, including each employee’s gross pay (before any deductions are made), all deductions and the purposes for which they are made, and the net amount payable after the deductions have been made (also known as take home pay). If you don’t give your employees an itemised payslip they could complain to an employment tribunal.

At the end of each tax year you must give them a summary of their pay and deductions on form P60. You must do this for each employee who was working for you at 5 April whose earnings reached the National Insurance Lower Earnings Limit during the tax year. This must be in paper format and must be given to the employee before 1 June following the end of the tax year.

Pay and deductions: the basics

Your Employer Annual Return (P35 and P14s)

After the end of the tax year – and by no later than 19 May – you must send HMRC an Employer Annual Return (P35 and P14s) summarising your payroll figures for the year. Almost all employers are required to file this return online.

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Getting started with PAYE

When you pay your employee for the first time you must check whether you need to operate PAYE and register as an employer with HM Revenue & Customs (HMRC). Once you have registered, you will receive a letter containing your Employer PAYE reference and a link to the appropriate guidance where everything you need to get started can be accessed.

How to register as an employer

PAYE when taking on a new employee – first steps

Register for PAYE Online for employers

Almost all employers are now required to file their Employer Annual Return (P14s and P35) and in-year forms P45 and P46 online. To do this you’ll need to have signed up to use HMRC’s ‘PAYE Online for employers’ service. You can sign up for PAYE Online as soon as you have registered as an employer. If you have registered as an employer using HMRC’s online tax registration service you will have automatically been signed up for PAYE online.

How to register as an employer

File your Employer Annual Return: P35 and P14s

Help and support from HMRC

HMRC offers a range of support options to help you get your tax affairs right.Help and support for businesses on the HMRC website – Opens in a new window

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PAYE forms and deadlines at a glance

When you operate PAYE you’ll use certain key forms and procedures to keep a record of all the payments you make to your employees. Some forms give you the information you’ll need to operate PAYE correctly and you’ll use others to tell HM Revenue & Customs (HMRC) about your employees and their pay details.

Employee forms

• Form P45 – new employees who have had a previous job, or have had a period on state benefits, will give you a P45 when they start. When they leave you give them a completed P45 for their new employer.
• Form P46 – your employee will usually need to complete a form P46 or supply the information for you to complete if they don’t have a P45. Part 1 gives your employee’s personal details, including their National Insurance number, current/recent work history and any student loan details. Part 2 gives details about your PAYE scheme and the tax code you’re using for them.
• Form P60 – you’ll need to issue a form P60 to each employee who was working for you at 5 April whose earnings reached the National Insurance Lower Earnings Limit (LEL) during the tax year. The P60 shows the employee’s pay and tax for the whole year. This can be in either paper or electronic format and must be given to the employee before 1 June following the end of the tax year.

Almost all employers must file forms P45 and P46 online. For details, see our related guide below.

File your PAYE in-year forms: P45, P46, etc

Start of tax year forms

• Forms P9(T), P9X – these tell you about the tax codes to use for your employees for the following tax year – from 6 April. For some employees you might get an individual form P9(T), showing their new tax code based on their individual circumstances. For your other employees, form P9X will tell you how to work out their new codes, based on any changes that the previous Budget has made to tax rates or allowances.
• Form P7X – this form tells you about any more changes that you’ll need to make to your employees’ tax codes as a result of the Budget. These changes usually apply from May.

Once you have registered with the ‘PAYE Online for employers’ service, HMRC will start to send you these tax code notices online rather than by post. You’ll need to log on and check for new notices, or else provide the service with an email address so that you can be alerted each time a new notice is sent to you.

Starting the tax year: codes and forms

Viewing the notices and reminders HMRC sends you online

Payroll administration forms

• Form P11 Deductions Working Sheet – you use form P11 (or an equivalent record) for each employee to keep details of their pay and deductions throughout the year. Although the P11 is available in paper format, you will save yourself time and effort by using payroll software or HMRC’s P11 Calculator which is part of the Basic PAYE Tools package – for details see our guide on choosing a payroll system.
• Form P14 – at the end of each tax year you must complete form P14 for each employee whose earnings reached the LEL. This is a summary of the information you have recorded throughout the year on each P11. Your P14s must reach HMRC no later than 19 May and almost all employers are required to file them online.
• Form P35 – you list details of all your employees on form P35 and the amount of Income Tax and National Insurance contributions (NICs) you have deducted from each of them. Your P35 must reach HMRC no later than 19 May and almost all employers are required to file it online.

Choosing a payroll system

File your Employer Annual Return: P35 and P14s

Expenses and benefits forms

• Forms P9D, form P11D or form P11D(b) – you use these forms to tell HMRC about expenses and benefits you have provided to your employees. Use form P11D for company directors and employees who earn at a rate of £8,500 a year or more and form P9D for employees who earn less than that. Use form P11D(b) to report the total amount of Class 1A NICs due on the benefits that have been recorded on all your P11Ds. You must ensure all these forms reach HMRC by 6 July.
• Form P11D(X) – you can use this form to apply for a dispensation to cover certain expenses and benefits you provide to your employees. If HMRC agrees to cover an item in a dispensation, you won’t have to report it on forms P11D or P9D.
• Form P46 (Car) – you use this form to tell HMRC if you give an employee the use of a company car.

Expenses and benefits for employers

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PAYE online filing requirements

You can submit many PAYE forms over the internet once you have registered with HM Revenue & Customs (HMRC’s) ‘PAYE Online for employers’ service. Sending information online is quick and easy and it’s more reliable and efficient than using paper forms.

Taking care to make sure your send HMRC the correct information about your employees will save you time by reducing the number of employee queries you get, as well as helping to make sure that your employees pay the correct tax and National Insurance contributions.

Over 80 per cent of problems are caused because the wrong information is held about an employee’s name, date of birth or National Insurance number.

Name – make sure that you use the full name and not just the initial(s). Ensure that the forename(s) and surname are correctly spelled and that they are in the right order.

Date of birth – always use the correct date of birth. Do not use a default date or make one up.

National Insurance number – always use the correct National Insurance number. Do not make a number up or use someone else’s.

Wherever possible, check the information with a trusted official source such as a birth certificate or passport

Online filing is also a requirement for a number of key PAYE forms:

• Employer Annual Return (P35 and P14s)
• P45 and P46 and a number of other in-year forms

How to register as an employer

Understanding and using PAYE Online for employers

File your Employer Annual Return: P35 and P14s

File your PAYE in-year forms: P45, P46, etc

Full list of PAYE forms you can send or receive online

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