When you run payroll, you calculate how much an employee has earned and make the deductions that apply to them. For most employees, this includes Income Tax and National Insurance. Depending on the person’s circumstances, payroll may also include student or postgraduate loan repayments, pension contributions and other deductions.<\/p>\n
You then report the relevant pay and deduction figures to HMRC and pay the amounts due.<\/p>\n
So, do employers pay PAYE? The terminology can be slightly confusing here. Income Tax deducted under PAYE comes from the employee’s pay. Employee National Insurance is also deducted from their earnings. The employer is responsible for calculating, deducting, reporting and sending those amounts to HMRC.<\/p>\n
Employers may also have their own payroll liabilities, most notably employer National Insurance contributions. That means an employers’ PAYE bill can contain money deducted from employees alongside amounts that are an additional cost to the employer.<\/p>\n
What is a PAYE scheme?<\/h2>\n
A PAYE scheme is the HMRC payroll record created for an employer that operates PAYE.<\/p>\n
Once you register as an employer for PAYE, HMRC gives you identifiers including an employer PAYE reference and an Accounts Office reference. These references connect your payroll reports and payments with the correct employer record.<\/p>\n
You’ll then use payroll software<\/a> to ensure that everything is calculated correctly and report information to HMRC through Real Time Information<\/a>, commonly shortened to RTI.<\/p>\n If all of these acronyms such as PAYE, RTI, FPS and EPS are starting to become a bit too much, our guide to common HR abbreviations and terms<\/a> can help.<\/p>\n Most businesses that employ staff need to register for PAYE.<\/p>\n For the 2026\/27 tax year, HMRC says<\/a> you must register for PAYE if an employee is paid \u00a396 or more a week<\/strong>, receives expenses or company benefits, receives a pension, has had another job during the tax year or has received certain taxable state benefits. According to HMRC<\/a>, you may still need to keep payroll records even where PAYE registration is not required.<\/p>\n If you are the only employee of a limited company as the director of that company, you may also need to register for PAYE, depending on your earnings. This is required for state pension years, for example. HMRC says employers should register before the first payday and cannot normally register more than two months before they start paying people.<\/p>\n We’ll keep the employer PAYE registration process brief here because setting up a new PAYE scheme and registering for PAYE as a new employer is a topic in its own right.<\/p>\n Broadly speaking, PAYE payroll follows the same cycle each time you pay employees:<\/p>\n HMRC requires employers to report payments and deductions on or before payday in most cases.<\/p>\n The exact numbers can change from one employee to another, even where two people have the same gross salary. Tax codes, National Insurance categories, pensions, student loans, benefits, bonuses and changes in pay can all affect your calculation.<\/p>\n Automate calculations, stay compliant, and pay your team on time with Factorial.<\/p>\n \n \n Get a demo <\/a>\n <\/div>\n\n Although people often want to know how PAYE is calculated each month, PAYE is actually calculated according to the frequency with which the employee receives pay. An employee might be paid weekly, fortnightly, every four weeks or monthly. (Yes, there is a difference between four-week and monthly pay cycles!)<\/p>\n The Income Tax calculation<\/strong> starts with taxable pay and the employee’s tax code. Payroll software then applies the appropriate allowances<\/strong> and tax rates<\/strong> for that employee.<\/p>\n Many tax codes operate on a cumulative basis<\/strong>. That means the calculation takes account of relevant pay and tax from earlier in the tax year, rather than looking at each month on its own. HMRC can also instruct employers to use a week 1 or month 1 basis, which looks at the current pay period<\/strong> without taking earlier pay and tax into account.<\/p>\n For 2026\/27<\/a>, the standard Personal Allowance is \u00a312,570. Income Tax rates and bands also depend on where the employee is a taxpayer, with different rates applying in Scotland. The employee’s tax code helps payroll apply the right rule.<\/p>\n If you want the numbers broken down further, our guide to calculating UK payslips<\/a> explains how gross pay, PAYE Income Tax, National Insurance and net pay work.<\/p>\n An employee’s tax code tells payroll how their Income Tax should be calculated.<\/p>\n For a new starter, the initial code will usually come from their P45. If they do not have a P45, you normally need information from a starter declaration<\/strong> so you can work out the code and starter information<\/strong> to use when you first report them to HMRC. Collecting this information is important to include in a new starter checklist<\/a>, so you don’t forget.<\/p>\n HMRC can also issue a new tax code later. When it does, the employer must update payroll<\/strong> accordingly.<\/p>\n Tax codes can also carry prefixes or special markers<\/strong>. An S prefix, for example, relates to Scottish Income Tax, while a C prefix relates to Welsh Income Tax. W1 and M1 indicate a week 1 or month 1 basis. Our full guide to UK tax codes<\/a>\u00a0covers the common codes and what they mean.<\/p>\n PAYE payroll can contain several deductions. Some are taxes collected for HMRC, while others relate to pensions, loans or arrangements between the employer and employee.<\/p>\n Income Tax is the deduction most closely associated with PAYE.<\/p>\n The amount taken depends on taxable earnings, the employee’s tax code, applicable tax rates and, where a cumulative code is used, relevant pay and tax from earlier in the tax year.<\/p>\n The employer makes the calculation through payroll and deducts the amount before the employee receives their net pay.<\/p>\n PAYE and National Insurance are closely connected, but they are not the same thing.<\/p>\n To begin with, there are different National Insurance classes<\/a>. Employees may pay Class 1 National Insurance through payroll once their earnings reach the applicable threshold, and employers may also owe a separate employer Class 1 contribution.<\/p>\n For the 2026\/27 tax year, the standard employee rate<\/a> is 8% on earnings between the Primary Threshold and Upper Earnings Limit, followed by 2% above the Upper Earnings Limit. The standard employer rate is 15% on earnings above the Secondary Threshold, although different categories and reliefs can change the amount you owe.<\/p>\n Employer National Insurance is not deducted<\/strong> from the employee’s wages. It is an employer cost.<\/p>\n Employers may also need to deduct student loan or postgraduate loan repayments through payroll when the relevant conditions are met.<\/p>\n These deductions are included in payroll reporting and form part of the amount accounted for through the employer’s PAYE process.<\/p>\n Payroll may need to account for employee pension contributions and the employer’s own pension contributions.<\/p>\n Exactly how pension contributions interact with taxable pay depends on the pension arrangement, so your payroll setup needs to reflect the scheme being used.<\/p>\n Employee expenses and benefits can also affect payroll and tax reporting.<\/p>\n Some expenses can be reimbursed without Income Tax or National Insurance where the relevant conditions are met. Others may be taxable or reportable. If your employees travel for work, for example, see our guide to HMRC meal allowance rates<\/a> for the rules around expenses.<\/p>\n Employee benefits<\/a> in kind are another area to watch. Their tax and National Insurance treatment depends on the type of benefit and whether you process it through payroll or report it separately.<\/p>\n For employees, their payslip is where they see PAYE.<\/p>\n Employers must provide employees and workers who are entitled to a payslip with one on or before payday<\/strong>. It must show earnings before and after deductions<\/strong>, variable deductions such as Income Tax and National Insurance, and hours worked where pay varies according to time worked, which requires strict time tracking with an attendance tracker<\/a> most of the time. Fixed deductions must also be shown on the payslip and explained.<\/p>\n A typical payslip may therefore show:<\/p>\n For a closer look at each field, see our payslip explained<\/a> guide or our guide to HMRC payslips<\/a>. Employers creating their own payroll documents can also use our employee payslip template<\/a> as a starting point.<\/p>\n A standard payroll model made in Excel based on the HMRC template that you can use to prepare your employees' payroll.<\/p>\n \n \n Download for free <\/a>\n <\/div>\n\n One of the more confusing parts of HMRC PAYE for employers is the number of different references involved. These references are not interchangeable.<\/p>\nWho needs to register for PAYE?<\/h2>\n
How PAYE works<\/h2>\n
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Run payroll without the headaches<\/h4>\n \n
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\n <\/div>\n <\/div>\n<\/div>\nHow is PAYE calculated each month?<\/h2>\n
Tax codes and PAYE deductions<\/h3>\n
PAYE deductions explained<\/h2>\n
Income Tax<\/h3>\n
National Insurance contributions<\/h3>\n
Student and postgraduate loans<\/h3>\n
Workplace pension deductions<\/h3>\n
Expenses and benefits<\/h3>\n
PAYE on employee payslips<\/h2>\n
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Save time for your HR team with this Excel payslip template.<\/h4>\n \n
\n <\/div>\n <\/div>\n<\/div>\nPAYE reference numbers<\/h2>\n
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