What is a PAYE payment?

Business owners have both responsibilities and legal obligations, one of which is registering for PAYE payments if applicable. Understanding what PAYE is and how it works helps to ensure compliance with HMRC procedures. This section provides insights into what PAYE entails.

PAYE definition

PAYE is the abbreviation of the term ‘Pay As You Earn’. It is the amount of income tax that is deducted from employees and directors’ salaries. The system was introduced in 1944 and has become a mandatory system for all businesses operating in the United Kingdom. The scheme is used to pay income tax and National Insurance contributions. It details the amount of income tax that is deducted from a gross salary or a pension. The tax is directly sent to HMRC and goes towards funding welfare services such as the NHS, state pensions and child benefits.

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When do businesses use PAYE?

Most businesses will need to register for PAYE, though there are exceptions based on the organisation’s specific circumstances, especially regarding employee or director pay levels. Employers should consider registering for PAYE in the following scenarios:

• When employees are paid above a specific salary per week
• When employees have had another job
• If employees claim expenses
• If employees receive pension contributions from the employer
• If employees have been on Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit

It is recommended that employers use payroll software to calculate what they need to pay. This helps streamline the process and avoid potential human errors.

Related: What employers should know about temporary workers and agency workers

PAYE and income tax

There is often some confusion about the differences between PAYE and income tax – for most employees, they seem essentially the same thing. However, there are some important distinctions to note.

PAYE encompasses more than just income tax; it also includes National Insurance contributions and any other taxes due to HMRC. These could be overpaid taxes, credits or tax debts from previous years.

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How much can you earn before you need to pay income tax?

The amount associated with PAYE is determined through an employee’s income tax and calculated according to thresholds. The current rates can be checked on HMRC’s website. At the time of writing they are:

• 0% on any earnings up to £12,570
• 20% on earnings between £12,571 – £50,270
• 40% on earnings between £50,271 – £125,140
• 45% on earnings over £125,140

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Components of PAYE deductions

PAYE covers more than just income tax. It also includes various deductions and contributions, which are outlined below:

• Class 1 and 1B National Insurance
• Class 1A National Insurance on termination awards and sporting testimonials
• Student loan repayments
• Construction Industry Scheme (CIS) deductions
• Apprenticeship levy payments under certain conditions

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Key PAYE payment dates and schedule for employers

To help you stay compliant with HMRC, below we have made a list of various payment methods available and key deadlines in the Pay As You Earn system.

PAYE payment methods

There are various ways to pay PAYE. As an employer, making timely payments avoids penalties. Employers can find the most current PAYE payment methods on the gov.uk website.

• Same or next day payments can be made online or via the phone banking system. They can also be made via CHAPS or through the employer‘s online bank account
• Payments within three working days can be made by single payment direct debit or corporate credit card online, by BACS, at the employer‘s bank or building society via cash or cheque, by cheque through the post to reach HMRC by the 19th of the month or by single payment direct debit if you have set one up before
• Payments within five working days payments can be made by single payment direct debit if you haven’t set one up before 

If the deadline falls on a weekend or on a bank holiday, ensure that your PAYE payments reach HMRC before the deadline.

PAYE payment dates

There are several important dates to follow regarding PAYE as an employer throughout the tax year to ensure compliance with regulations. At the time of writing, these are:

• 1st of the month: staging date for new companies
• 5th of the month: PAYE month-end date
• 19th of the month: deadline for PAYE and National Insurance contribution payment for non-electronic methods
• 22nd of the month: PAYE and NICs payment deadline for electronic methods
• 31st May: deadline for providing a P60 form for each employee working for the business on 5th April
• 6th July: deadline for filing all Expenses and Benefits Forms P11D(b), P9D, and P11D
• 19th July: deadline for PAYE and Class 1 A NIC payment for non-electronic payment methods
• 22nd July: This is the due date for PAYE and Class 1 A NIC payment for electronic payment methods
• 31st July: submission deadline for PAYE settlement agreements
• 19th October: PAYE and Class 1 B NIC payment due date for non-electronic payment methods
• 22nd October:  PAYE and Class 1 B NIC payment due date for electronic methods

For a simplified overview, these are the key PAYE deadlines, depending on whether payments are monthly or quarterly:

• 22nd of the following tax month if you pay monthly
• 19th of the following month if you pay by post
• 22nd after the end of the quarter if you pay quarterly

Related: What is pro rata?

What happens if you miss the PAYE deadline?

If you miss a PAYE deadline for payment, HMRC will contact you and penalties will apply. If the late payments are recurrent or if the employer has not paid the full amount due within six months, HM Revenue and Customs will add an extra 5% penalty on the outstanding balance. If a further six months elapses, an additional 5% will be added.

It’s easy to see how these penalties can snowball, turning a missed payment into a much bigger financial burden. It is important for employers to stay on top of their PAYE obligations to avoid challenging situations. Businesses can keep track of what they owe by regularly checking their account on the HMRC website to ensure that payments are up to date and avoid additional costs.

For businesses that are finding it difficult to meet the PAYE deadlines, it is possible to reach out to HMRC. This should be done as soon as possible. HM Revenue and Customs can propose payment plans or other solutions that can help businesses manage the situation before it spirals out of control.

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Managing PAYE is not just ticking a box for employers, it is a vital part of the business’s legal and financial responsibilities. Staying informed about deadlines, understanding the various elements of PAYE and ensuring timely payments can keep your organisation in good standing with HMRC and avoid costly penalties. By using payroll software and regularly checking your obligations on the HMRC website, you can streamline the process and reduce the risk of errors. For businesses struggling to meet deadlines, HMRC can provide support. A proactive approach will help safeguard your business from financial pitfalls, ensuring you stay compliant and focused on your business growth.