How to Set Up a PAYE Scheme for Employers

The UK’s Pay As You Earn (PAYE) system collects Income Tax and National Insurance contributions directly from employee wages. For employers, operating a PAYE scheme is a responsibility for managing payroll and ensuring tax compliance. This system provides a framework for employees to fulfill their tax duties as they earn income.

Determining Your Need for PAYE Registration

Employers in the UK are obligated to register for a PAYE scheme with HMRC under specific circumstances. This requirement arises when a business employs its first individual. Registration is triggered even if the employee earns below the Income Tax Personal Allowance, as National Insurance contributions might still be due.

Registration is required when an employee earns above the National Insurance Lower Earnings Limit. If an employee’s earnings exceed this amount, both employee and employer National Insurance contributions become relevant, necessitating a PAYE scheme.

Company directors are subject to PAYE deductions even if their earnings fall below the National Insurance Lower Earnings Limit. Directors are considered employed and require PAYE processing from the start of their directorship. Businesses must distinguish between employed individuals and self-employed contractors. HMRC provides criteria to determine employment status, as misclassification can lead to significant penalties for unpaid taxes and National Insurance.

Failing to register for PAYE when required can result in penalties and interest charges from HMRC on any overdue tax and National Insurance. Employers must understand these triggers to ensure timely compliance. Correctly assessing employment relationships from the outset is important.

Gathering Required Information for Registration

Before registering a PAYE scheme, employers must compile details and documentation. Information is needed for both the employer and the first employee.

Employer details include legal name, any trading name, and primary business address. If the business has previously operated a PAYE scheme, the existing Employer PAYE Reference is required. Companies provide their Company Registration Number; sole traders and partnerships need their Unique Taxpayer Reference (UTR). Contact details for the person responsible for PAYE are also necessary.

For the first employee, personal details are required, including their full name, date of birth, gender, and current address. The employee’s National Insurance (NI) number is also required. Employers need the employment start date and details from their previous employment, typically from a P45 form or Starter Checklist. Confirmation of whether the employee is a company director is also needed, as this impacts tax calculations.

Employer’s bank account details are needed for payments to HMRC. This ensures that collected Income Tax and National Insurance contributions can be remitted correctly and on time.

Registering Your PAYE Scheme

Employers can register their PAYE scheme with HMRC once information is gathered. The most common method is through the HMRC website. Other avenues, such as registering through an agent, also exist.

To register online, employers navigate to the new employer registrations section on the GOV.UK website. The system guides users through prompts, requesting employer and employee details. This includes inputting business names, addresses, and identification numbers like the Company Registration Number or UTR. The system also asks for contact details of the person managing PAYE.

The online portal prompts for the first employee’s details: full name, date of birth, National Insurance number, and employment start date. Information from the employee’s P45 or Starter Checklist establishes their tax code. After completing required fields, the application can be submitted electronically.

Upon successful submission, HMRC processes registration within several days. Employers receive their Employer PAYE Reference number and Accounts Office Reference number. These identifiers are used for all future communications and payments with HMRC.

Running Your PAYE Scheme

After registering a PAYE scheme and receiving reference numbers, employers have ongoing operational responsibilities. This involves payroll management, reporting, and payment to HMRC.

Employers must accurately calculate employee pay and deductions. This involves determining gross pay, then deducting Income Tax based on the employee’s tax code, and National Insurance contributions. Other statutory deductions, such as student loan repayments or pension contributions, must also be withheld. Many employers use payroll software or service providers to automate calculations.

Employers must regularly report pay and deductions to HMRC using the Real Time Information (RTI) system. The main submission is the Full Payment Submission (FPS), sent on or before each payday, detailing employee earnings, deductions, and new starters or leavers. An Employer Payment Summary (EPS) is submitted less frequently, for example, when claiming Employment Allowance or reporting nil pay.

Collected Income Tax and National Insurance must be paid to HMRC by specific deadlines. Payment is due by the 22nd of the month following the payroll period. HMRC provides online accounts where employers can view their liabilities and make payments.

Maintaining accurate payroll records is another requirement. This includes details of employee earnings, deductions, dates of payment, and copies of all RTI submissions. At the end of each tax year, employers must provide employees with a P60 summarizing their pay and deductions for the year. A final FPS and EPS submission for the tax year is also required to reconcile all payroll data with HMRC.