United Kingdom
PAYE explained: How UK payroll works for employers
If you are employing someone inthe United Kingdom for the first time, you will encounter PAYE very quickly. Itis the system that HM Revenue and Customs (HMRC) uses to collect income tax and National Insurance contributions directly from your employees' wages before you pay them. There is no way around it. If you have employees in the UK, you are in the PAYE system.
For international employers,particularly those without a UK entity, PAYE can feel like one of the more complicated parts of UK hiring. The tax codes, the reporting deadlines, the penalties for getting it wrong. It is a lot to take in.
This guide explains how PAYE works, what your obligations are as an employer, and how an Employer of Record can handle the whole process on your behalf.
What is PAYE?
PAYE stands for Pay As You Earn. It is the UK's system for collecting income tax and National Insurancecontributions from employees' wages at the point of payment. Instead ofemployees filing a tax return at the end of the year and paying what they owe inone lump sum, HMRC collects the tax as the employee earns it.
The system is administered by HMRC, and it applies to every employer in the UK who pays an employee £96 ormore per week, provides benefits or expenses, or has another job. In practice, if you have employees in the UK, you are almost certainly required to operate PAYE.
The key thing to understand isthat PAYE is not optional. It is not a choice between different payroll systems. It is the legal mechanism for collecting employment taxes, and every employer must use it.
How does PAYE work in the UK?
The PAYE process follows fivesteps, and each one has a specific deadline or requirement.
Before your first payday, you must register as an employer with HMRC. This can be done online through the GOV.UK website. Registration typically takes up to five days, so it is worth doing well in advance of your first payroll run.
Once you are registered, HMRC provides a taxcode for each employee. The tax code tells you how much tax-free pay the employee is entitled to in each pay period. The most common code for the 2026/27 tax year is 1257L, which means the employee has a personal allowance of £12,570.
For every pay period, you calculate how much income tax and National Insurance to deduct from the employee's gross pay. The amount depends on their tax code, their earnings, and whether they have any student loan deductions or pension contributions.
On or before each payday, you must submit a Full Payment Submission (FPS) to HMRC through your payroll software. This tells HMRC exactly what you have paid each employee and what deductions you have made. If you have no employees to pay in a particular month, you submit an Employer Payment Summary (EPS) instead.
You must pay the tax and National Insurance you have collected to HMRC by the 22nd of the following tax month if paying electronically, or by the 19th if paying by cheque. If your average monthly PAYE liability is less than £1,500, you maybe able to pay quarterly instead.
UK income tax rates and bands
Income tax in the UK is progressive. The more you earn, the higher the rate of tax you pay on the portion of income above each threshold.
For the 2026/27 tax year in England, Wales, and Northern Ireland:
Employee benefits
Statutory benefits
The employer must add the employee into an auto-enrolment pension scheme. Minimum contributions are 8% of which the employer must contribute at least 3%.
Common additional benefits
- Gym Membership
- 25 days holiday
- Flexible Working
- Private Health Insurance
- RSU’s
- Supplementary Pension
- Life Insurance
- Income Protection
Statutory leave
- Vacation – 5.6 weeks including public holidays
- Sick leave – Statutory Sick Pay (SSP) after 3 days
- Parental Leave – 18 weeks of unpaid leave up to the child's birthday. Maximum of 4 weeks per year allowed to be taken.
- Maternity leave – 39 weeks of paid leave entitlement, with a further 13 weeks unpaid additional entitlement.
- Paternity Leave – 2 weeks
Wondering if expanding in the UK is right for you?
Employer of Record United Kingdom
The Employer of Record in UK handles all taxes, employment, compliance and payroll obligations. The legal employer of a worker is the Employer of Record.
Pound (GBP)
67 Million
London
GBP 12.71 per hour
English
37.5 – 40 hours per week