PAYE
PAYE is the system through which a company deducts income tax and National Insurance from salaries and pays them to HMRC. Any company paying a director or employee above the reporting thresholds must operate it and report each payday.
Also known as: Pay As You Earn
How it works
A company registers as an employer, runs payroll on or before each payday, and submits a Full Payment Submission to HMRC in real time. Tax is deducted using the employee's tax code, National Insurance using their category letter. Amounts owed are paid to HMRC by the 22nd of the following month electronically, or quarterly if the average monthly liability is under £1,500.
Registration is needed once any employee earns at or above the lower earnings limit of £6,500 a year, receives benefits, or has another job or pension. A single-director company paying a small salary below that level may not need a scheme at all, though most directors run one anyway to evidence the salary and protect the corporation tax deduction.
Deadlines are strict and penalties are automatic: late Full Payment Submissions attract monthly penalties based on employee numbers, and late payment attracts interest and percentage penalties. Year-end reporting adds P60s by 31 May and P11Ds or payrolled benefits reporting by 6 July.
Auto-enrolment sits alongside PAYE. Once you employ someone other than a single director, pension duties are triggered automatically and The Pensions Regulator expects a declaration of compliance whether or not anyone joins.
Who this affects
- Every company paying a salary, including single-director companies
- Employers taking on a first employee and triggering auto-enrolment duties
- Directors relying on salary to create a qualifying state pension year
- Companies paying benefits, which must now largely be reported through payroll
Common mistakes
- Filing the payroll after payday rather than on or before it
- Paying HMRC late and assuming interest will not be charged
- Ignoring auto-enrolment duties for a first employee
- Running no payroll but claiming a salary deduction in the accounts
Frequently asked questions
Do I need PAYE for a single-director company?
Only if the director earns at or above the lower earnings limit of £6,500, receives benefits or has other employment income. Many directors register anyway to support the salary deduction.
When do I pay HMRC?
By the 22nd of the following tax month if you pay electronically, or quarterly where your average monthly liability is below £1,500.
What are the penalties for late payroll filing?
Monthly penalties based on the number of employees, starting at £100 for small employers, plus interest and penalties on late payments.
What is a tax code?
HMRC's instruction to payroll about how much tax-free pay to give. The standard code reflects the £12,570 personal allowance, adjusted for benefits, underpayments or other income.
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Reviewed by Waqas Sagar ACA FCCA FMAAT · Last reviewed 13 September 2026 · Figures for 2026/27 · About our practice
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