PAYE, short for Pay As You Earn, is HMRC's system for collecting Income Tax and National Insurance from wages and workplace pensions at source. The employer works out the deductions every payday using the employee's tax code, reports them to HMRC in real time, and pays the total to HMRC by the 22nd of the following tax month (the 19th if paying by post). For 2026/27 the standard tax code is 1257L, built on the £12,570 Personal Allowance.
What PAYE tax actually is
"PAYE tax" is not a separate tax. It is ordinary Income Tax, plus Class 1 National Insurance, collected through payroll instead of through a tax return. Section 684 of the Income Tax (Earnings and Pensions) Act 2003 requires HMRC to make "PAYE regulations" for collecting tax on all PAYE income. The detail is in the Income Tax (Pay As You Earn) Regulations 2003.
An employer's PAYE bill can include:
- Income Tax. Deducted from employees according to their tax codes;
- Class 1 National Insurance. Both the employee's contributions and the employer's own 15%;
- Student and postgraduate loan repayments. Deducted from pay above the relevant plan thresholds;
- Construction Industry Scheme deductions. For contractors;
- Apprenticeship Levy. At 0.5%, for employers whose pay bill is over £3 million, less a £15,000 allowance.
How PAYE works on each payday
Every time staff are paid, the employer's payroll software:
- Applies the tax code. It gives the employee their share of the tax-free allowance for the period. Normally this is cumulative, so tax is worked out on total pay since 6 April;
- Calculates National Insurance. This is worked out by pay period. Employees pay 8% between £242 and £967 a week and 2% above. The employer pays 15% above £96 a week;
- Produces payslips. These must be given on or before payday;
- Sends a Full Payment Submission (FPS). This must reach HMRC "on or before" the payment is made (regulation 67B), even if the employer pays HMRC quarterly.
The tax rates applied are the employee's own. For 2026/27, outside Scotland, income above the Personal Allowance is taxed at 20% on the first £37,700, 40% up to £125,140 and 45% above. Scottish taxpayers have codes starting with S and pay six Scottish rates from 19% to 48%. Welsh taxpayers have codes starting with C and currently pay the same rates as England.
Monthly deadlines for employers
| Task | Deadline |
|---|---|
| Send FPS | On or before each payday |
| Send Employer Payment Summary (EPS) to claim reductions, or to report no pay in a month | 19th of the following tax month |
| Pay HMRC electronically | 22nd of the following tax month |
| Pay HMRC by cheque through the post | Must arrive by the 19th |
Tax months run from the 6th to the 5th. The 22nd and 19th dates come from regulation 69, which allows 17 days after the end of the tax period for electronic payment and 14 days otherwise. Employers who reasonably expect their average monthly payments to be under £1,500 can choose to pay quarterly under regulation 70. They still send an FPS every payday. Late payment attracts interest, and penalties that rise with the number of late payments in the tax year. How to pay, which bank account to use and how to build the payment reference are covered in our guide to paying PAYE.
Year-end and other PAYE forms
- P45. Given to an employee who leaves, showing pay and tax to date and the tax code;
- Starter checklist. Used when a new employee has no P45, to choose the right starting code. See our starter checklist guide;
- P60. Given to everyone employed on 5 April, before 1 June. Gov.uk puts it as "by 31 May";
- P11D and P11D(b). Benefits in kind that are not payrolled are reported, and Class 1A National Insurance is declared, by 6 July. Class 1A is then paid by 22 July.
Employers must keep PAYE records for at least 3 years after the end of the tax year they relate to (regulation 97).
Starting as an employer
You must register with HMRC as an employer before the first payday to get an employer PAYE reference. That includes a limited company whose only employee is its director. HMRC's guidance says you usually need to operate PAYE on employees earning £129 a week or more, which is the 2026/27 lower earnings limit. Registration is triggered earlier, though: you must register if any employee is paid £96 a week or more, gets expenses or benefits, has another job or gets a pension. Even so, an employer already running a scheme should record and report everyone it pays. Self-employed contractors are outside PAYE, so getting employment status right matters. Errors bring extra tax, National Insurance, interest and penalties.
PAYE from the employee's side
For employees, PAYE means most people never file a tax return for their salary. The tax code is the moving part. If HMRC holds wrong information, too much or too little tax is taken, and the difference is usually adjusted through the code or a P800 calculation after the year end. New starters without a P45 may be put on an emergency code such as 1257L W1 or M1 until HMRC issues the correct one. Our emergency tax code guide explains what that means.
PAYE does not cover everything. Dividends, rental income, self-employed profits and most investment income sit outside it and go through Self Assessment, although HMRC can sometimes collect small amounts of tax on them through the tax code.
The primary references are HMRC's running payroll guidance and the rates and thresholds for employers 2026 to 2027.
Acumon registers new employers and runs monthly PAYE, RTI submissions and year-end reporting through its PAYE services, with fully managed options in outsourced payroll. If you are about to take on your first employee, register before the first payday, not after it.