PAYE for Employers: Setting Up and Running Payroll

Introduction: Understanding PAYE

As a UK employer, navigating the complexities of payroll is a fundamental responsibility. At the heart of this lies PAYE (Pay As You Earn), HM Revenue & Customs' (HMRC) system for collecting Income Tax and National Insurance Contributions (NICs) directly from your employees' wages. Understanding PAYE is not just about compliance; it's about ensuring your employees are paid correctly, your business meets its legal obligations, and you avoid potential penalties.

This comprehensive guide will walk you through everything you need to know about setting up and running PAYE payroll in the UK for the 2026/27 tax year. From initial registration with HMRC to understanding Real Time Information (RTI) reporting, National Insurance rates, Employment Allowance, statutory payments, and year-end duties, we'll cover the essential steps to keep your payroll running smoothly.

Registering as an Employer with HMRC

You generally need to register as an employer with HMRC if you start to employ staff, even if they are family members. You must register before your first payday. If you don't, you could face penalties.

When to Register

You need to register if you pay anyone over the PAYE threshold, provide expenses or benefits, or if you have an employee who already has another job or is receiving a pension. You must register with HMRC at least a few weeks before your first payday to ensure you receive your PAYE reference number and Accounts Office reference in time.

How to Register

1. Gather Information: You'll need your Government Gateway user ID and password (if you don't have one, you can create one during registration), your business type, business address, and the date you started paying people.
2. Register Online: Go to the GOV.UK website and search for "Register as an employer". Follow the online instructions to complete the registration process.
3. Receive References: HMRC will send you a letter with your PAYE reference number (e.g., 123/AB45678) and Accounts Office reference number. These are crucial for all future communications and payments to HMRC.

Running Payroll: Key Components

A. Real Time Information (RTI) Reporting

Real Time Information (RTI) is HMRC's system for receiving payroll information. Instead of annual returns, employers must send information to HMRC every time they pay their employees, or at least once a month if no payments are made. This ensures HMRC has up-to-date information on PAYE and NICs.

Accurate and timely RTI submissions are critical for compliance. Failure to submit on time or with incorrect data can lead to penalties.

Types of RTI Submissions:

B. Calculating Deductions: Income Tax and National Insurance

Income Tax

Income Tax is deducted from an employee's gross pay based on their tax code. The tax code tells you how much tax-free income an employee is allowed in a tax year. HMRC issues tax codes, and payroll software automatically applies them to calculate the correct tax deduction.

National Insurance Contributions (NICs)

Both employees and employers pay National Insurance Contributions. These contributions go towards certain state benefits, such as the State Pension. The rates and thresholds are updated annually.

2026/27 National Insurance Rates and Thresholds

Employer Class 1 NICs Rate (2026/27): 13.8% on earnings above the Secondary Threshold (£9,100 annually).

Different National Insurance categories (e.g., A, B, C, J, M, Z) apply based on an employee's circumstances (e.g., age, marital status, whether they're in a Freeport). Most employees will be on Category A.

C. Employment Allowance

The Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to a certain amount. For the 2026/27 tax year, this allowance is £5,000.

Eligibility Criteria:

• Your business must have paid less than £100,000 in Class 1 National Insurance liabilities in the previous tax year.
• You cannot claim if you're a sole director company with no other employees.
• You can only claim against one PAYE scheme if you have multiple.

D. Statutory Payments

Employers are responsible for administering various statutory payments to eligible employees. These include payments for sickness, maternity, paternity, and adoption.

Key Statutory Payments (2026/27):

*Note: AWE stands for Average Weekly Earnings. Employers may be able to reclaim some or all of the statutory payments from HMRC.*

E. PAYE Payment Deadlines

After submitting your FPS and EPS, you'll need to pay the total PAYE bill (Income Tax, NICs, student loan deductions) to HMRC. The deadline depends on how you pay:

• 19th of the month: If paying by post (e.g., cheque).
• 22nd of the month: If paying electronically (e.g., Faster Payments, Bacs, CHAPS).

These deadlines are for the previous tax month. For example, for payments made in April (6 April to 5 May), the payment is due by 19th or 22nd May. You can pay quarterly if your average monthly PAYE bill is less than £1,500.

Year-End Obligations

At the end of each tax year (5 April), employers have specific obligations to fulfil.

P60: End of Year Certificate

You must provide a P60 to every employee who was working for you on the last day of the tax year (5 April) and for whom you deducted tax and National Insurance. The P60 summarises their total pay and deductions for the tax year.

• Deadline: Issue P60s to employees by 31 May.

P11D and P11D(b): Expenses and Benefits

If you provide employees with expenses or benefits that are not processed through payroll (e.g., company cars, private medical insurance), you'll need to report these to HMRC using forms P11D and P11D(b).

• P11D: Reports the value of expenses and benefits provided to individual employees.
• P11D(b): A declaration that you've submitted all P11Ds and tells HMRC how much Class 1A National Insurance you need to pay on the benefits.
• Deadline: Submit to HMRC and provide copies to employees by 6 July. Pay Class 1A NICs by 22 July (19 July if paying by post).

Choosing Payroll Software: Manual vs. Automated

While HMRC provides Basic PAYE Tools for small employers, many businesses opt for commercial payroll software due to its enhanced features and efficiency.

Common Pitfalls and How to Avoid Them

Conclusion

Operating PAYE payroll effectively is a cornerstone of responsible employer practice in the UK. By understanding the nuances of registration, RTI reporting, National Insurance, Employment Allowance, statutory payments, and year-end obligations, you can ensure compliance and foster a positive working environment for your employees.

Staying informed about HMRC's guidelines and leveraging appropriate payroll tools are key to managing your PAYE responsibilities efficiently. Remember, accurate payroll isn't just a legal requirement; it's vital for your business's financial health and your employees' trust.