UK HR Term
PAYE
Pay As You Earn (PAYE) is the UK system by which employers deduct income tax and National Insurance contributions from an employee's pay before paying them, and remit those amounts to HMRC.
In plain English
PAYE is the system HMRC uses to collect income tax and National Insurance from employees as they earn, rather than asking them to settle up at the end of the year. Every UK employer with at least one employee earning above the Lower Earnings Limit must operate PAYE.
How it works
Each pay period:
- The employer calculates the employee's gross pay
- Applies the employee's tax code to work out income tax
- Applies National Insurance bands for both employer and employee NICs
- Deducts the tax and NICs from gross pay
- Pays the employee net
- Reports the figures to HMRC via Real Time Information (RTI)
- Pays the deductions to HMRC monthly (or quarterly for very small employers)
Tax codes
Each employee has a tax code that tells the employer how much pay is tax-free. The default for 2024–25 is 1257L (£12,570 personal allowance, type L). Codes change for higher earners, those with adjustments, or those in special schemes.
Real Time Information
Since April 2013, employers must report PAYE to HMRC on or before each pay date through RTI. Before RTI, employers reported annually — RTI gave HMRC near real-time visibility of pay and tax.
Penalties
Late or incorrect PAYE returns trigger automatic penalties. Submitting on time but underpaying triggers interest and possible surcharges. Most accounting and payroll software handles RTI automatically.