What is PAYE?

Many founders encounter PAYE first as employees, where it operates invisibly — tax and National Insurance are deducted from wages before payment. When those same founders start a business and take on employees or pay themselves a salary as a company director, they find themselves on the other side of the system and responsible for operating it correctly.

PAYE — Pay As You Earn — is the system used by HMRC to collect Income Tax and National Insurance from employees at source. Employers calculate the correct deductions, report them to HMRC through the Real Time Information system, and pay over the amounts deducted along with any employer National Insurance due. Limited company directors who take a salary must operate PAYE for themselves as well as for any employees.

Operating PAYE incorrectly or failing to submit RTI reports on time can result in penalties and interest charges. Most small businesses use payroll software or outsource payroll to an accountant or payroll bureau to ensure accuracy and compliance. Our guide to PAYE for small business owners explains how the system works and what employers are responsible for managing.