PAYE (Pay As You Earn)

What does PAYE collect?

For the 2026/27 tax year, a PAYE bill mainly covers:

• Income Tax, based on each employee’s tax code, usually 1257L for the £12,570 Personal Allowance
• employee Class 1 National Insurance, normally 8% on earnings between £12,570 and £50,270 a year and 2% above
• employer National Insurance at 15% on earnings above £5,000 a year
• student loan repayments and, for construction contractors, CIS deductions

When does a company need to register?

An employer must register with HMRC before the first payday, but no more than 2 months before it starts paying people. Registration is needed if anyone employed in the current tax year:

• is paid £96 or more a week
• gets taxable expenses or company benefits
• has had another job or is getting a pension
• has received Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit

The rule applies even when the only person paid is the company’s director. HMRC’s registration letter gives the employer PAYE reference and the Accounts Office reference used for payments.

How PAYE works each tax month

In each tax month (the 6th of one month to the 5th of the next), the employer:

1. Calculates pay, tax and National Insurance in payroll software and gives each employee a payslip.
2. Sends a Full Payment Submission on or before payday.
3. Sends an Employer Payment Summary by the 19th of the following tax month to claim reductions such as Employment Allowance, or to report a month with no payments.
4. Pays HMRC by the 22nd of the following tax month, or by the 19th if paying by cheque through the post.

Employers expecting to owe less than £1,500 a month can arrange to pay quarterly, by the 22nd after each quarter ends.

Year-end tasks

• Send the final FPS on or before the last payday of the tax year, which ends on 5 April.
• Give every employee a P60 by 31 May.
• File P11D forms by 6 July for benefits not taxed through payroll, plus a P11D(b), and pay Class 1A National Insurance by 22 July.

PAYE for single-director companies

SmartFiling’s guide recommends a £12,570 salary for 2026/27 for most single-director companies, with further income usually taken as dividends.

A director paid £12,570 a year on code 1257L pays no Income Tax or employee National Insurance. The company pays employer National Insurance of £1,135.50 (15% of the £7,570 above £5,000). Employment Allowance cannot cover it, because the director is the only employee paid above the £5,000 threshold.

Dividends are not paid through payroll. Tax on dividends above the £500 allowance goes through Self Assessment or, for dividends up to £10,000, can be collected by adjusting the tax code.

Penalties and records

A late FPS can lead to a monthly penalty from £100 (1 to 9 employees) to £400 (250 or more). HMRC does not charge for the first failure in a tax year, or where payments are reported within 3 days of payday, although regular late filers can still be penalised. Payroll records must be kept for 3 years from the end of the tax year they relate to, and the employer stays legally responsible for PAYE even when someone else runs payroll.