Last updated: October 2026. Figures verified against HMRC rates and thresholds for employers 2026 to 2027.
Pay As You Earn (PAYE) is HMRC’s (HM Revenue & Customs) system for collecting Income Tax and National Insurance from employees’ wages before they’re paid. Getting to grips with PAYE for employers means registering before your first payday, working out deductions using each employee’s tax code, reporting them to HMRC on or before payday through RTI (Real Time Information), and paying HMRC monthly.
Key Employer PAYE Obligations:
- Register with HMRC before your first payday
- Apply the correct tax code HMRC provides
- Calculate Income Tax and National Insurance deductions accurately
- File the FPS on or before each payday
- Pay HMRC by the 22nd of the following month
To make things easier for you, this guide focuses on how PAYE for employers actually works in practice—registration, tax codes, payslip mechanics, and reporting deadlines—basically everything you need to know to understand and use PAYE correctly!
What is PAYE?
PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance directly from employees’ wages before payment.
PAYE is how HMRC collects Income Tax and National Insurance at source. Instead of employees settling one bill a year, the employer works out what’s owed on each payment, holds it back, and passes it to HMRC. It isn’t a tax in itself. PAYE is Income Tax (and National Insurance) collected through a particular route.
Two things follow from that. As the employer, you’re the collection agent, so liability for getting it wrong sits with you. And because tax is worked out on every single payment, the system has to cope with people who join, leave, change hours, or take a bonus mid-year—not just a tidy annual total.
Key 2026-27 PAYE Thresholds
| Threshold | Weekly | Monthly | Annual | Rate |
|---|---|---|---|---|
| Secondary Threshold (employer NI starts) | £96 | £417 | £5,000 | 15% |
| Lower Earnings Limit | £129 | £559 | £6,708 | — |
Tax year: 6 April 2026 to 5 April 2027
How does PAYE for employers work?
So, how exactly does PAYE work? We’ve broken it down into 8 easy steps:
- Work out gross pays: salary, overtime, bonus, statutory payments, benefits.
- Apply the tax code to see how much pay is free of tax.
- Calculate Income Tax against the right bands for the jurisdiction.
- Calculate National Insurance using the category letter.
- Apply other deductions including student loans, pension, earnings orders.
- Pay the employee and issue a payslip.
- Submit a Full Payment Submission (FPS) on or before the date you pay them.
- Pay HMRC by the 22nd of the following month.
Steps 3 to 5 are arithmetic, and that’s what payroll software is for. Steps 1, 6, 7, and 8 are the areas that carry actual risk; getting the timing wrong can carry serious consequences that HMRC will notice.
When do you need to register for PAYE?
You need to register with HMRC for PAYE as soon as you start employing staff, or when you take on subcontractors for construction work.
PAYE registration requirements
According to HMRC guidance for 2026-27, you must register if any employee, in the current tax year:
- is paid £96 or more a week (£417 a month, £5,000 a year)—the Secondary Threshold
- receives expenses or benefits
- receives a pension
- has another job, or has had one since 6 April
- receives Jobseeker’s Allowance, Employment and Support Allowance, or Incapacity Benefit
- works for you as a subcontractor in construction (CIS registration required)
A quick word on that £96 figure, since it’s often confused with other thresholds. It’s the Secondary Threshold—the point at which employer National Insurance starts—not the Lower Earnings Limit, which sits at £129 for 2026-27. The Lower Earnings Limit isn’t the trigger for registration at all, so it’s worth double-checking which figure you’re working from.
You’ll need to register before your first payday. Allow five working days for your reference to come through, and don’t register more than two months ahead of that date. This also applies even if you’re only employing yourself, as the sole director of a limited company, for example. So, the “just me” setup doesn’t get you off the hook.
Be aware that even if nobody on your payroll crosses a threshold, you still need to keep payroll records. It’s a small admin habit that saves a lot of hassle if HMRC ever asks questions later.
Registering for PAYE and PAYE Online
To use PAYE, you need to register through GOV.UK. If you do so online, PAYE Online enrolment will happen automatically. But, if you choose to register by phone or post, you’ll need to enrol manually afterwards.
Something to be aware of; HMRC posts an activation code within 10 days of registration, and you must activate it within 28 days of the letter date or it expires. This means you’ll be back at step 1 and need to re-enrol. Put that date in the project plan. A payroll that can’t file because nobody opened the post is a common, and entirely avoidable, early penalty.
ERN number
When you register as an employer, you will receive an ERN number, also known as a PAYE reference number. This is the number you’ll see on all payroll related documents and is used for tax and payroll processes.
Your PAYE references
| Reference | Format | Identifies | Used for |
|---|---|---|---|
| Employer PAYE reference (ERN) | 123/AB45678 | The PAYE scheme | RTI submissions, P60s, P45s, P11Ds, liability insurance, pension setup |
| Accounts Office reference | 123PA00012345 (13 characters) | The account HMRC collects into | Every payment to HMRC |
Larger organisations often hold several PAYE schemes, each with its own references, submissions and payment.
What does PAYE actually deduct?
PAYE covers several deductions, each with its own rules:
- Income Tax: three tax bands and rates in England, Wales and Northern Ireland, six in Scotland.
- National Insurance: an employee and employer charge, set by the NI category letter, with its own thresholds on both sides.
- Student and postgraduate loans: five plan types, each with its own threshold and rate, taken from the P45, starter checklist or an SL1 notice.
- Pension contributions that are enforced by The Pensions Regulator rather than HMRC, with eligibility and minimum contribution rates set out in law. Tax treatment depends on the scheme: a net pay arrangement reduces taxable pay but not NIable pay; relief at source takes contributions after tax, with the provider reclaiming basic rate relief; salary sacrifice cuts gross salary itself, and with it both NI figures.
This works well as a system precisely because it’s modular—but it also means one wrong input, an out-of-date tax code, the wrong NI letter, the wrong loan plan, throws off several numbers at once, not just one.
Tax codes: how they drive the numbers
A tax code tells you how much pay is free of tax and which rules apply. The 2026-27 standard code is 1257L; multiply the number by ten and you get the tax-free amount.
You never invent a code yourself as HMRC issues them by P6 or P9 notice, or you take one from a P45 or starter checklist. If one looks wrong, apply it anyway and point the employee to HMRC.
Decode a tax code
Tax code decoder
Type any UK tax code. Handles number codes, BR and D codes, K prefixes, S and C prefixes and W1, M1 or X suffixes, at 2026-27 rates.
The standard suffix codes, L, M, N, T, BR, D0, D1, NT, W1, M1, and X, are all covered in our list of UK tax codes.
The 2026-27 emergency code is 1257L W1, 1257L M1, or 1257L X. It just means HMRC doesn’t have enough data yet for a cumulative calculation.
PAYE coding notices
A PAYE coding notice (or notice of coding) is HMRC telling you which code to operate. Employers get P6 notices during the year and P9 notices before a new tax year, while employees get a P2. They arrive through PAYE Online or a Data Provisioning Service feed straight into payroll software, which beats rekeying every time.
A payslip, line by line
Numbers help more than description here, so here’s a full worked example: a £42,000-a-year employee, paid monthly, on code 1257L, category A, in England, with a Plan 2 student loan and a net pay pension (5% employee, 3% employer).
| Line | Item | Amount | Note |
|---|---|---|---|
| 1 | Gross pay | £3,500.00 | £42,000 ÷ 12 |
| 2 | Employee pension, 5% | £175.00 | Deduction |
| 3 | Taxable pay | £3,325.00 | Gross less pension |
| 4 | Income Tax | £455.50 | Deduction |
| 5 | Employee National Insurance | £196.16 | Deduction |
| 6 | Student loan, Plan 2 | £94.00 | Deduction |
| 7 | Net pay | £2,579.34 | Into the bank |
| 8 | Employer National Insurance | £462.45 | Never shown to the employee |
| 9 | Employer pension, 3% | £105.00 | Never shown to the employee payslip |
| 10 | Total monthly cost | £4,067.45 | £48,809.40 a year |
In this example, the employer’s total cost is £4,067.45 a month—about 16% more than the employee’s £3,500 gross pay, once employer NI and pension contributions are added.
A net pay arrangement reduces taxable pay, not NIable pay. That’s why line 3 and the National Insurance calculation on line 5 start from different figures. Employer NI is charged on the full £3,500 gross, above the £417 monthly Secondary Threshold, at 15%.
What must legally appear on a payslip?
Every worker, not just every employee, has the right to an itemised pay statement on or before payday. It must show gross pay, the amount and purpose of variable deductions, fixed deductions (unless you issue a standing annual statement), net pay, and the method of any part payments.
Since April 2019, it must also show the hours being paid for where pay varies with time worked. Getting any of this wrong on a persistent basis is one of the more common routes to an employment tribunal.
Reporting to HMRC: RTI, the FPS, and the EPS
Real Time Information (RTI) is how PAYE data reaches HMRC, and it’s worth getting comfortable with, since most of the penalties employers pick up trace back to one of two submissions:
- Full Payment Submission (FPS): pay and deductions for everyone paid, due on or before the date you pay them. Not the date you run payroll, and not the date the Bacs file lands. This one rule generates more penalties than anything else.
- Employer Payment Summary (EPS): what reduces the bill including statutory recovery, the Employment Allowance claim, levy figures, or a nil month. Due by the 19th of the following tax month.
Paying HMRC
Pay electronically by the 22nd of the following month, or by the 19th if you’re paying by post. If the 22nd falls on a weekend or bank holiday, cleared funds need to arrive by the last working day before. Our Statutory Payroll Reporting page provides a full key deadline breakdown.
Good news for smaller employers: if your average monthly PAYE and NI bill is under £1,500, you can pay quarterly instead, against the exact quarter-end dates.
Always quote the Accounts Office reference with the right period indicator, or HMRC allocates the payment to the wrong month and chases money you’ve already paid.
What records do you need to keep?
Keep PAYE records for three years after the end of the tax year they relate to. HMRC can inspect them, and can charge up to £3,000 where they’re inadequate. Hold onto what you paid and deducted, reports and payments to HMRC, leave and sickness records, tax code notices, taxable expenses and benefits, and Payroll Giving documents.
If records are lost, stolen or destroyed, tell HMRC straight away, recreate what you can, and mark any FPS figure that’s an estimate.
Common PAYE mistakes to avoid
- Late FPS filing: Submitting after payday triggers automatic penalties, so file on or before the payment date, not when you run payroll.
- Using the wrong tax codes: Always apply the code HMRC provides, even if it looks wrong, and direct employees to HMRC to query it.
- Missing activation deadlines: Activate your PAYE Online code within 28 days, or you’ll need to re-enrol from scratch.
- Confusing thresholds: The £96 a week Secondary Threshold triggers registration, not the £129 Lower Earnings Limit.
- Paying HMRC late: Electronic payments must clear by the 22nd, and weekends and bank holidays mean paying earlier.
Running payroll yourself or outsourcing it
However, you handle PAYE for employers, in-house or outsourced, the choice usually comes down to headcount and appetite for owning the detail.
| Option | Works for | Watch out for |
|---|---|---|
| HMRC Basic PAYE Tools | Very small employers (fewer than 10 employees) | No payslips, no auto-enrolment assessment, no pension files—it files, it doesn't run payroll |
| Payroll software in-house | Employers with the expertise to own it, or multiple schemes and frequencies | You still need people who understand PAYE—software removes the arithmetic, not the judgement |
| Outsourced payroll | Employers without an in-house payroll team, or who'd rather this wasn't their job | Handover quality—check the provider is BACS approved and CIPP accredited, and who's accountable for late filing |
Under about 200 employees, payroll outsourcing is almost always the better economics—licences plus the staff to run them rarely pay for themselves at that scale. From around 200 to 5,000 employees, with multiple schemes or complex terms, in-house payroll software earns its place, provided it’s HMRC-recognised and runs the whole cycle rather than just filing, which is exactly what our payroll software buyer’s guide is there to help you weigh up.
Still finding PAYE for employers a lot to keep on top of?
Pull back from the detail and PAYE comes down to a handful of habits, done consistently: register before that first payday, apply the tax code HMRC gives you rather than guessing, work out the right deductions from the tax code and category letter, file the FPS on or before payday, and pay HMRC by the 22nd. Do those five things every pay period, for every employee, and the rest, the bands, the thresholds, the loan plans, is arithmetic rather than risk.
That consistency is exactly where things go wrong for a lot of employers, and exactly where good payroll software earns its keep. It won’t replace the judgement calls, a category letter that needs checking, a starter with no P45, a tax code that looks off, but it will stop the arithmetic and the deadlines from being the thing that trips you up.
It’s what we’ve built Cintra’s payroll software to do: HMRC-recognised, updated automatically as rates and thresholds change, and built to handle the full PAYE cycle rather than just the filing.
If you’d like to see how it handles PAYE for employers—a live payroll run, tax codes, NI categories, RTI submissions and everything above—you’re welcome to book a demo and we’ll walk you through it.
Payroll Software
Find out more about Cintra's payroll software, built to handle whatever your workforce needs—no matter how complex. Packed with deep functionality, intuitive workflows, and expert support for in-house payroll teams.
Frequently Asked Questions
Q. How does PAYE for employers work?
A. You register with HMRC, get an employer PAYE reference and an Accounts Office reference, then each pay period work out Income Tax and National Insurance from the tax code and category letter, deduct them, file an FPS on or before payday, and pay HMRC by the 22nd.
Q. How much does PAYE cost employers?
A. Income Tax and employee NI are your employees' money, not your cost. Your real cost is secondary Class 1 NI at 15% above £96 a week, Class 1A at 15% on benefits, and the Apprenticeship Levy at 0.5% above a £3 million pay bill, less up to £10,500 of Employment Allowance.
Q. Is it illegal to pay cash in hand?
A. Paying wages in cash is legal. Failing to operate PAYE on it isn't. You still need to deduct Income Tax and National Insurance, issue a payslip, file an FPS on or before payday, and keep records. Cash without PAYE is evasion.
Q. Can I opt out of PAYE?
A. No. If someone's an employee, PAYE has to be operated on their pay. Genuinely self-employed contractors settle through Self Assessment instead, but employment status is decided by the facts, not the label on the contract.
Q. Do you get PAYE tax back?
A. Sometimes. If too much has been deducted—on an emergency code, say, or after stopping work mid-year—HMRC refunds it. Under a cumulative code, that happens automatically in the next payroll. Otherwise, HMRC reconciles after the tax year ends.
Q. What is a PAYE reference number?
A. The employer PAYE reference, or ERN, identifies your PAYE scheme and looks like 123/AB45678. It appears on P60s, P45s and every RTI submission, and isn't the same as the 13-character Accounts Office reference used for payments.
