Pay As You Earn (PAYE) and Payroll

What is Pay As You Earn (PAYE)?

Pay As You Earn (PAYE) is an HMRC system that employers use to calculate and deduct Income Tax, National Insurance Contributions (NIC), student loan repayments, pension contributions, child maintenance, and other relevant payments from employees’ salaries or wages before they receive them.

Most employers need to operate PAYE through their payroll software and report their employees’ payments and deductions to HMRC each payday. Employer’s National Insurance is also calculated and paid through PAYE.

Do I need to register my company for PAYE?

You only need to register your company for PAYE if any employees (including directors) meet at least one of the following conditions:

• are paid £120 or more per week (2021-22 tax year)
• receive a pension
• have a second job
• receive expenses or other employee benefits

Additionally, you must register for PAYE if you operate under the Construction Industry Scheme (CIS) as a contractor.

Do I need to register for PAYE if I do not have any employees?

You may still have to register for PAYE even if you do not have any employees. PAYE registration will depend on whether you (or any other directors) take a director’s salary of £120 or more per week and/or receive employee expenses or benefits through the company, and/or whether the company pays subcontractors to do construction work.

Do I have to register my company as an employer?

You will have to register your company as an employer with HMRC if you employ staff (this includes directors) or use subcontractors for construction work, but only if the company:

• pays any of its employees or directors £120 or more per week (Lower Earnings Limit for National Insurance contributions)
• employs someone who receives a pension or has a second job
• provides expenses and/or benefits to any employees or directors
• uses subcontractors under the Construction Industry Scheme (CIS)

However, if none of these conditions are met, you do not have to register as an employer or set up PAYE, but you must still keep payroll records of what employees and directors are paid.

How do I register as an employer and set up PAYE?

You can register an an employer and set up PAYE online. If you need to register your company for PAYE, you must do so before the first payday, but no more than 2 months in advance. Within 5 working days of registering, you should receive a letter with your PAYE reference number. You will need this to enrol for PAYE Online and send payroll information to HMRC.

Does my company need to run payroll?

If your company has one or more employees (including directors), you must run payroll each time they’re paid, even if they earn less than £120/week. Through HMRC’s PAYE system, your company’s payroll will:

• record and calculate each employee’s pay and deductions
• calculate your employer’s National Insurance contributions
• produce payslips
• report employees’ pay and deductions to HMRC in a Full Payment Submission (FPS) on or before payday

You can set up payroll once you’ve registered with HMRC as an employer. You can run and manage payroll yourself using payroll software, or you can outsource these administrative tasks to an accountant or professional payroll provider.

Do I need to use a payroll provider?

You do not have to use a payroll provider. You can choose to run and manage your company’s payroll yourself, using payroll software. However, outsourcing this complex and time-consuming administrative task to your accountant or a professional payroll provider may be of benefit to you, especially if you have no prior experience and/or you have more than a couple of employees.

What payroll records does my company need to keep?

As an employer, you must keep records of everything associated with hiring and paying your employees (including directors). This includes a record of each employee’s pay and deductions, reports made to HMRC (i.e., Full Payment Submissions and Employer Payment Summaries), payments made to HMRC (i.e., Income Tax and National Insurance), employees’ leave and sickness absences, tax code notices, and taxable expenses and benefits provided to employees.

Do I need to make pension contributions for employees

By law, all employers are legally required to provide a workplace pension scheme. You must automatically enrol and make pension contributions for any employee who earns at least £10,000/year, is aged between 22 and the State Pension age, and usually works in the UK.

If any of your employees earn between £6,240 and £10,000 per year, you do not have to automatically enrol them, but they are entitled to join the workplace pension and you must then make pension contributions.

You do not have to make pension contributions for any employee who is paid £6,240 or less per year (£520/month, £120/week, or £480 over 4 weeks), but they are entitled to join the workplace pension and make their own contributions.

Do I pay employer’s National Insurance through PAYE?

If any of your employees (including directors) earn at least £170/wk or £737/month (Secondary Threshold for National Insurance Contributions), you will be required to pay employer’s National Insurance through PAYE on each payday. This will be charged at a rate of 13.8% of the employee’s pay above the threshold.

Are company directors and shareholders classed as employees?

Company directors are classed as employees for the purpose of taxation, because they are paid a salary through PAYE. Shareholders, however, are not classed as employees. They are beneficial owners of a company, who are paid dividends from their shareholdings. They must report and pay dividend tax on their dividend income through Self Assessment.

Are directors' salaries paid through PAYE

Directors’ salaries are normally paid through PAYE as part of the company’s payroll. On each payday, whether weekly or monthly, the company will automatically deduct Income Tax, National Insurance contributions, and any other relevant payments from directors’ salaries before they are paid.

Are shareholder dividends paid through PAYE?

Shareholder dividends are not paid through PAYE. They are normally paid directly into a shareholder’s bank account, though some companies may pay dividends in cash or by cheque. Shareholders are responsible for reporting and paying tax on dividend income through Self Assessment.

Can I pay employees in cash through PAYE?

Whilst most UK companies pay their employees by direct bank transfer, you can pay employees in cash through PAYE. Your payroll and PAYE obligations are exactly the same in this situation - you must record and calculate employees’ pay and deductions (e.g., tax, National Insurance, pension contributions, benefits), calculate and pay employer’s National Insurance, produce payslips, send reports to HMRC, and keep all payroll records.