PAYE explained simply means understanding how employers deal with Income Tax, National Insurance and certain other deductions through payroll before an employee receives their wages.

Whether you employ staff or your employer pays you through PAYE, the system works quietly in the background every payday.

It has also been around for more than 80 years.

In this episode, we look at what PAYE is, why the government introduced it, what employers need to do, what employees should check and why good payroll management matters to the wider finances of a business.

About this episode

PAYE stands for Pay As You Earn.

Employers use the system through payroll so HMRC can collect Income Tax and National Insurance from employees.

Payroll can also deal with other deductions, including student and postgraduate loan repayments where they apply.

For an employee, the payroll process deals with much of the tax calculation connected with wages before the net pay reaches the bank account.

For an employer, PAYE is not optional administration that you can simply ignore. If the rules require you to operate PAYE, you need to calculate the deductions correctly, report the payroll and pay HMRC on time.

“PAYE - pay as you earn - is the official translation or pain as you earn if I've heard some people say.”

What does PAYE actually do?

The basic idea is straightforward.

An employer calculates an employee's gross pay and then uses payroll to work out the correct deductions.

Those can include:

• Income Tax
• employee National Insurance
• student or postgraduate loan repayments where applicable
• other payroll deductions that apply to the employee

Those deductions leave the employee with their net pay.

The employer reports the payroll information to HMRC and pays over the relevant tax and National Insurance.

That is why PAYE sits at the centre of the relationship between an employee, their employer and HMRC.

Why was PAYE introduced?

The history takes us back to the Second World War.

The government introduced PAYE in 1944 to collect Income Tax from employment more regularly and efficiently.

Before PAYE, the tax system collected money from employees much less frequently. The government needed a system that brought tax in as people earned their wages rather than relying on larger payments later.

There is one useful historical distinction to make.

PAYE started collecting Income Tax in 1944. HMRC's own historical timeline shows National Insurance contributions joining the system from 1948.

The system has changed enormously since then, particularly with digital payroll and Real Time Information, but the central idea remains much the same: calculate what somebody owes as they earn their pay.

Why has PAYE lasted for more than 80 years?

Quite simply, the basic model works.

For employees, employers normally deduct tax throughout the year, so workers do not face one large tax bill at the end.

For government, PAYE provides a regular flow of tax receipts.

For employers, it provides a structured payroll system, although it also makes the employer responsible for calculating, reporting and paying over those deductions.

“It's a very efficient system, certainly for the government of an army of unpaid tax collectors.”

That line sums up one side of PAYE rather nicely.

The employer does a significant amount of the collection work on HMRC's behalf.

Employer responsibilities under PAYE

If you take on employees, PAYE brings several practical responsibilities.

First, register as an employer with HMRC before the first payday where the rules require you to do so. HMRC normally lets you register up to two months before you start paying people.

You then need payroll software or a payroll service that can record employee details, calculate pay and deductions, and report the required information to HMRC.

For each payroll, the main process includes:

1. calculating the employee's gross pay
2. using the correct tax code
3. calculating Income Tax and National Insurance
4. processing student or postgraduate loan deductions where applicable
5. calculating the employee's net pay
6. reporting the payroll to HMRC
7. paying the employee
8. paying the relevant PAYE and National Insurance to HMRC

You also need to keep appropriate payroll records and give employees the documents they are entitled to receive.

Reporting payroll to HMRC

Under Real Time Information, employers normally report employee pay and deductions using a Full Payment Submission, or FPS.

Employers normally send the FPS to HMRC on or before the employee's payday.

This gives HMRC payroll information throughout the tax year rather than leaving everything until one annual return.

When you take on a new employee, you include their details in the payroll reporting process too.

This is one reason accurate information at the beginning of employment matters.

When do employers pay PAYE to HMRC?

Employers also need to pay the payroll deductions to HMRC on time.

Employers normally need to pay PAYE and National Insurance by the 22nd of the following tax month when paying electronically, or by the 19th when using certain non-electronic methods.

Some smaller employers can pay quarterly where their average monthly PAYE and National Insurance liability is less than £1,500.

This creates an important cash-flow point.

The Income Tax and employee National Insurance you deduct from wages are not spare cash for the business. You need to pass those amounts to HMRC.

If you use that money to plug another cash gap, you can create a much bigger problem when the PAYE payment date arrives.

Payslips, P45s and P60s

Payroll is not only about sending numbers to HMRC.

Employees need information too.

A payslip should show the employee what they have earned and the deductions from their pay.

When somebody leaves employment, the employer gives them a P45 showing the relevant pay and tax information.

If an employee still works for you on 5 April, you normally need to give them a P60 showing their pay and tax for the tax year.

Employers must provide the P60 by 31 May.

Employees have responsibilities too

The employer may operate the payroll, but employees should not assume that every figure is automatically correct.

If you are an employee, make sure your employer has the right personal information.

When you start a new job, your employer normally uses your P45 to help establish your payroll details and tax code.

If you do not have a P45, HMRC's starter checklist can provide the information your new employer needs.

You should also check your payslips and your tax code.

A wrong tax code can mean paying too much tax or not enough.

If the employer deducts too little, the employee may eventually face an additional tax bill.

“Whether you are paying somebody or being paid yourself, it pays to pay attention.”

PAYE is more than Income Tax

One reason payroll can feel complicated is that PAYE sits alongside several other employer responsibilities.

National Insurance is an obvious example.

For 2026/27, employers generally pay standard Class 1 National Insurance at 15% on relevant earnings above the standard Secondary Threshold of £5,000 a year, subject to the employee's National Insurance category and any relief that applies.

Employees in the standard category generally pay Class 1 National Insurance at 8% between the Primary Threshold and Upper Earnings Limit, then 2% above the Upper Earnings Limit.

For a broader explanation, see National Insurance Easily Explained.

Company directors also follow particular National Insurance calculation rules, which we cover in Director National Insurance.

The full cost of employing somebody

The episode makes another important point: salary is only one part of the cost of employing somebody.

When planning your staffing budget, think about the wider package, including:

• gross salary or wages
• employer National Insurance
• workplace pension contributions where applicable
• holiday pay
• statutory payments and other employment costs
• payroll software or payroll-service costs

That matters particularly when you are thinking about hiring your first employee.

A salary that looks affordable on its own can produce a noticeably higher total employment cost once you include the other obligations.

Our guide to holiday pay obligations for employers looks at one part of that wider cost.

Why PAYE matters for cash flow

Payroll is one of the most important recurring cash commitments in many organisations.

Employees expect you to pay them correctly and on time.

HMRC expects employers to report and pay PAYE liabilities correctly and on time.

You also need to fund pensions and other employment costs.

That means your cash-flow planning should not stop at the headline wage figure.

You need to know when payroll leaves the bank, when PAYE falls due to HMRC and what other employment costs fall around those dates.

Good payroll therefore contributes to good financial control.

What happens when PAYE goes wrong?

Mistakes can happen, but ignoring them can make matters worse.

Late payroll reports, incorrect deductions and late PAYE payments can lead to interest, penalties or extra correction work.

There is also an employee impact.

An incorrect tax code or deduction can leave somebody with the wrong net pay or a later underpayment of tax.

Good payroll software helps, and an experienced payroll provider can remove much of the administrative burden. However, the employer still needs to make sure the payroll information they provide is accurate.

A practical PAYE checklist for employers

1. Check employment status. Make sure the person is genuinely an employee rather than assuming everyone working for you belongs on payroll.
2. Register with HMRC. Do this before the first payday where PAYE registration is required.
3. Set up payroll properly. Use suitable payroll software or a payroll provider.
4. Collect the right employee information. Use the P45 or starter checklist where appropriate.
5. Use the correct tax code. Follow HMRC's current instructions and code notices.
6. Calculate all deductions. Include Income Tax, National Insurance and other applicable payroll deductions.
7. Submit the FPS on time. Normally report on or before payday.
8. Pay HMRC on time. Keep PAYE money available for the payment deadline.
9. Give employees their documents. Provide payslips and the relevant P45 or P60.
10. Budget for the full employment cost. Include employer National Insurance, pensions, holiday pay and other obligations.

FAQs

What does PAYE stand for?

PAYE stands for Pay As You Earn. Employers use the system through payroll to deduct Income Tax and National Insurance from employees' earnings.

When was PAYE introduced?

The government introduced PAYE in 1944 to collect Income Tax. HMRC's historical timeline shows National Insurance contributions joining the system from 1948.

When must an employer register for PAYE?

Employers normally need to register with HMRC before the first payday where PAYE registration is required. HMRC normally allows registration up to two months before you start paying people.

When does an employer report payroll to HMRC?

Employers normally send a Full Payment Submission on or before the employee's payday.

When is PAYE paid to HMRC?

Employers normally pay monthly PAYE by the 22nd after the end of the tax month when paying electronically, or by the 19th using certain non-electronic methods. Eligible smaller employers may pay quarterly.

Does PAYE mean employees never need a tax return?

No. PAYE deals with tax on employment income, but an employee may still need Self Assessment because of other income or circumstances.

What should an employee do if their tax code looks wrong?

Check the tax code and employment details and contact HMRC where necessary. A wrong code can make you pay too much or too little tax.

When must employers provide a P60?

If an employee still works for you on 5 April, you normally need to give them their P60 by 31 May.

Episode Timecodes

• 00:00 - PAYE, how it started and why it matters
• 00:28 - What the episode covers
• 01:06 - What PAYE means
• 01:30 - Why PAYE still matters
• 01:58 - PAYE for employees
• 02:20 - PAYE as an employer responsibility
• 02:39 - Why PAYE was introduced in 1944
• 03:02 - Collecting tax directly from wages
• 03:29 - Why the PAYE model lasted
• 03:52 - Benefits for employees and government
• 04:13 - PAYE as a legal obligation
• 04:33 - Employer responsibilities
• 04:58 - Tax, National Insurance and other deductions
• 05:17 - Paying HMRC, payslips and P60s
• 05:44 - Payroll software and employer responsibility
• 06:02 - Mistakes, late payments and penalties
• 06:23 - Employee responsibilities
• 06:42 - Starter checklist, payslips and tax codes
• 07:02 - Overpaying and underpaying tax
• 07:23 - Why PAYE matters to small businesses
• 07:39 - Paying people correctly and managing cash flow
• 07:58 - The full cost of employing somebody
• 08:28 - Why PAYE still matters today
• 08:54 - Reviewing your payroll processes

Related episodes and guides

• National Insurance Easily Explained
• Director National Insurance
• Holiday Pay Obligations for Employers

Key takeaway

PAYE explained simply comes down to collecting the right payroll information, calculating the right deductions, reporting them to HMRC and paying everybody at the right time.

For employees, employers deal with most tax on wages as they pay them.

For employers, PAYE creates a legal and financial responsibility that affects payroll, cash flow and the relationship with the team.

The government may have introduced the system in 1944, but the basic principle still works today.

Whether you are paying somebody or being paid yourself, keep an eye on the numbers.

Plan it. Do it. Profit.

Further Support

If you are taking on your first employee, reviewing your payroll or want help making sure your PAYE process works properly, you can contact us for an initial chat.

We can help with payroll, employer taxes, accounting systems, cash-flow planning and understanding the full financial cost of employing people.

You can also use our free online business calculators to support your wider financial planning.

For more practical finance and tax guidance, visit the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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PAYE, how it started, why it matters, and what you need to know is a topic of this week's episode of I Hate Numbers. Today I'm going to be diving into one of the most important but often overlooked parts of running a business in the United Kingdom, PAYE. Now, whether you are employing staff or getting paid through PAYE yourself, understanding how it works is pretty essential.

But where did it come from? Why was it introduced way back in 1944? And why is it still going strong today? And in this episode, I'm going to break down the history of PAYE and why it was a game changer: why PAYE still matters for businesses and employees in 2025, the responsibilities employers have under the system and the risks of getting it wrong,

what employees need to do to check to avoid overpaying or underpaying tax and why PAYE is a little bit more than just tax, how it affects your cash flow, payroll and team management.

Now, let's start off by demystifying PAYE together. Now, PAYE - pay as you earn - is the official translation or pain as you earn if I've heard some people say. It sounds a bit dry, doesn't it? Sounds a bit, you know, not a topic of conversation on the I Hate numbers podcast, but stick with me. This system has a fascinating history over 80 years old and it's still important today.

And understanding it can save you from some serious headaches. So whether you employ staff or whether your pay through PAYE yourself, grab a cup or your drink of choice and let's unravel it together. Now, what is PAYE? Well, let's start with the basics. Now, PAYE, as I said earlier, stands for pay as you earn. It's the system used in the United Kingdom to collect income tax and national insurance and other things such as student loan repayments directly from people's wages.

Now, if you're an employee, PAYE essentially means you don't have to worry about completing tax returns in general for your wages. In theory, it's all sorted out before your pay even deposits itself in your bank account. Now, if you're an employer, and employers, by the way, crosses the spectrum, it can be arts organisations, charities, not-for-profits, private businesses, big and small.

If you're in the net, it doesn't matter what type of business you are. Pretty much it's universal rules across the board, and PAYE is one of your employer's key responsibilities. So how did it all start? Well, let's take a bit of a trip down memory lane, a bit of history diving into. Now we've got to wind the clock back here.

Now imagine the situation, it's 1944. There's still a world war raging, and the UK government is spending huge amounts of money on the war effort. Planes, tanks, supplies, all of it needs money. All of it needs funding. Now, up until then, tax collection was a bit on the messy side. People in employment are paid once a year, just think of that often in one big lump sum.

And guess what? Lots of people didn't actually pay on time, if at all. So the government needed a better way to make sure taxes were collected reliably and on a regular basis. Cash flow was important, and that's when the idea of PAYE was developed, bought, and introduced. Now, instead of waiting for people to cough up at the end of the year, tax national insurance will be taken straight out of people's wages every time they got paid.

It was simple. It was effective, and it sold an incredibly massive problem. But here's the thing, it worked so well that 80 years later plus, we're still using it today. It's a very efficient system, certainly for the government of an army of unpaid tax collectors. Now, why is PAYE still relevant today? Why has it been with us for such a long time?

Well, firstly, it works. For employees, PAYE takes away the stress of working out the tax bill each year. You as an employee know what you owe. It's coming out of your wages automatically. You may not like that squeeze on your wages, but nevertheless, that is taken care of you. As far as the government is concerned, it guarantees a steady flow of money coming into fund

things like schools, hospitals, roads, public services. Now for employers, PAYE is just more than a helpful system. It's a legal obligation. You can't just say, I'm not going to operate it. If you meet the criteria, then you have to operate it effectively. If you don't, there are going to be fines and penalties hovering above your head.

Now, if you've got staff, not freelancers, even if it's just an individual person and they earn above certain thresholds, you've got to run PAYE properly. So what are the key responsibilities for an employer under PAYE? Well, let's break it down a bit. Now, as an employer, here's what PAYE means for you in essence. Firstly, you have to register as an employer with HMRC to shorthand for her Majesty's revenue and customs.

Secondly, you as the employer, and remember, this crosses the spectrum of business types from arts organisations, charities, not-for-profits, private businesses, you calculate how much tax, how much national insurance. Also, things like student loan deductions to deduct from each person's wages. Those deductions

that are made are then paid over to HMRC, typically monthly, and it can be quarterly. You provide employees with their payslips showing exactly what you've taken off and what it's for. And at the end of each tax year, documents such as P60s are given out so employees can see the total for the year. They may need those documents for other purposes, but it's your obligation, your responsibility as an employer to make sure those forms are distributed.

It sounds a lot. Well, it is anybody who thinks it's a light touch. But even with good payroll software or a payroll provider, cough, cough, it's all perfectly manageable. Now, the key thing is to remember it is your responsibility as an employer to get it right. If you get it wrong, well, let's have a guess what's going to happen.

HMRC will come knocking. Late payments, incorrect deductions, missing filings will typically lead to fines and penalties. So what about the responsibilities of an employee under PAYE? But you might think quite rightly that everything is on the employer's shoulders. Employees also though, have a role. Now,

as a starter for 10, it's up to employees to make sure their personal details are correct. That means you as the employee must give across the right national insurance number. You must make sure to check your tax code is correct. Sounds odd, but that's the truth. And any forms like the starter checklist,

when you join a new employer has to be completed correctly if you don't have a P45 from a previous job. And employees also have a responsibility to check their pay slips to make sure the right deductions are being made. Make sure the right tax code is being operated. Sounds odd, but it's true. And mistakes can

and do happen. If you think your tax code is wrong, you might be paying too much tax or not enough. HMRC will be operating that scrutiny and at some point they will want that money back. So whether you are paying somebody or being paid yourself, it pays to pay attention. Now, why does PAYE matter for small businesses, for arts organisations, for charities?

Well, if you're running a business, PAYE can fill just another bit of admin, just a juggle to add to your tax collector who administrative wrongs. But it's actually pretty important when you get PAYE, correct. It helps you obviously stay on the right side of HMRC, who wants to be on the wrong side, keeps your team happy.

Nobody wants to be paid late or incorrectly, and in my experience of 30 years plus, making sure that people are paid on time correctly, in the right manner is a really important consideration. If you are looking to manage cash flow, if you're looking to manage your finances a tool like Budgetwhizz, see the link in the notes, helping to manage those numbers becomes much easier.

Now the key thing is to plan for the full cost of employing somebody. PAYE deductions are just part of the picture. You also need to budget for things like Employers’ National Insurance, pension contributions, holiday pay, and sick pay. It's part of the package of being an employer. Now, please do check the show notes out folks when we have an employment calculator for 24 25 tax year, and also we're running a webinar on how to handle the increase in Employer's National Insurance in April 25.

I digress. Now, let's recap. PAYE might seem just like another lot of red tape on top of a lot of red tape already, but it's actually been helping small businesses and employees and employers stay on track since 1944. It makes sure tax is collected fairly and efficiently. It helps employees avoid big tax bills, and it keeps businesses running smoothly if you manage it correctly.

Now, whether you are just thinking about hiring your first member of staff or you've been running payroll for years, it always is worth giving your processes a regular check-up. If you're not sure where to start, you guessed it - I'm here to help. Now, if you found this episode useful, I’d love it if you could subscribe. Hey, even leave a review, share it with other business owners who might need to brush up on their PAYE knowledge.

Don't forget to check out Budgetwhizz. Check out our online calculators and register for your free webinar running on the 19th of March, 2025. Thanks for joining me. I'm Mahmood and until next time, plan it, do it, profit.