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:
Scotland has its own set of bands, which are slightly different:
UK tax codes explained
Tax codes are one of the parts of PAYE that confuse international employers the most. They are made up of a number and a letter, and they tell you how much tax-free pay an employee is entitled to.
The number represents the employee's personal allowance divided by 10, then minus 1. So a personal allowance of £12,570 becomes 1257. The letter indicates the employee's situation:
- L — entitled to the standard personal allowance (the most common)
- M — receiving the marriage allowance from their spouse
- N — transferring the marriage allowance to their spouse
- T — other items that HMRC needs to review
- BR — all income taxed at the basic rate (usually a second job)
- D0 — all income taxed at the higher rate
- D1 — all income taxed at the additional rate
- NT — no tax to be deducted
- 0T — no personal allowance (often used when HMRC does not have enough information)
- K — the employee has benefits that exceed their personal allowance
If an employee does not provide a P45 from a previous employer, you will need to use an emergency tax code until HMRC provides the correct one. The emergency code for 2026/27 is 1257L M1, which means the employee is taxed as if it is their first month of employment.
Getting tax codes wrong means either over-deducting tax (which upsets employees) or under-deducting tax (which HMRC will come back to you about). It is worth checking codes carefully every pay period.
When a new employee starts without a P45 from a previous employer, you should ask them to complete a "starter checklist" (formerly known as a P46). This tells you which tax code to use until HMRC provides the correct one. The starter checklist has three statements, and the
employee ticks the one that applies to them. Based on their answer, you apply either the basic rate (BR), the standard cumulative code (1257L), or the week/month 1 basis (1257L W1/M1)
When must an employer register for PAYE?
You must register for PAYE if any of the following apply:
- You pay any employee £96 or more per week
- You provide benefits or expenses to employees
- You have employees who have another job
- You are paying a pension to a former employee
Registration must happen before your first payday. If you register late, HMRC may charge penalties.
You can register online through GOV.UK, and it typically takes up to five days to receive your employer PAYE reference number. You cannot run payroll until you have this number, so it is important to plan ahead.
RTI reporting obligations
Real Time Information (RTI) is the reporting system that sits alongside PAYE. It requires employers to submit payroll information to HMRC on or before every payday, rather than once a year at the end of the tax year.
The two main submissions are:
Full Payment Submission (FPS): Submitted on or before each payday. It includes details of every employee paid in that period: their gross pay, deductions, net pay, and tax code.
Employer Payment Summary (EPS): Submitted if you have no employees to pay in a particular month, or if you need to claim reductions (such as statutory maternity pay or Employment Allowance).
If you submit the FPS late, or fail to submit it at all, HMRC will charge a penalty. The penalty is £100 per month for every 50 employees, and it applies even if you have no tax to pay. Persistent late filing can also trigger a compliance review.
At the end of the tax year (5 April), you must also submit a final FPS or EPS to reconcile the year's payroll. You need to give each employee a P60 certificate by 31 May, which shows their total earnings and deductions for the year. If an employee leaves during the year, you
give them a P45, which shows their earnings and deductions up to their leaving date. The new employer uses the P45 to set up the correct tax code.
PAYE penalties from HMRC
HMRC takes PAYE compliance seriously, and the penalties for getting it wrong can add up quickly.
Late filing: £100 per month for every 50 employees (or part thereof) if your FPS is late. If you file on time but make an error, you can correct it in the next FPS without penalty, provided the error is minor.
Late payment: Interest is charged from the due date to the date of payment. The rate is set by HMRC and currently sits at around 4% above the Bank of England base rate.
Incorrect returns: If you submit inaccurate information, HMRC can charge a penalty of up to 100% of the tax owed, depending on whether the error was careless or deliberate.
For international employers, the risk is not just financial. PAYE errors can trigger a broader compliance review that looks at your entire UK employment operation, including National Insurance, pension contributions, and right to work checks.
HMRC also conducts routine employer compliance checks, where they review your payroll records, verify that tax codes are correct, and check that you are reporting accurately through RTI. If you are selected for a check, you will need to provide payslips, P45s, P60s, FPS submissions, and evidence of payments to HMRC. Having clean, well-organised payroll records makes these checks much smoother.
PAYE for international employers using an EOR
If you are hiring in the UK without a legal entity, an Employer of Record takes on the PAYE obligations for you. The EOR registers as the employer with HMRC, assigns tax codes, calculates deductions, submits RTI returns, and pays HMRC on time.
Your company does not need to register for PAYE, invest in UK payroll software, or hire a UK payroll specialist. The EOR handles all of it.
What you do need to understand is the total cost of employment. PAYE is not the only deduction. On top of the employee's gross salary, you will also be paying employer National Insurance contributions (currently 15% on earnings above £5,000 per year) and pension
contributions (a minimum of 3% of qualifying earnings).
When you are comparing the cost of hiring through an EOR versus setting up your own entity, the PAYE and NI obligations are a significant part of the calculation. An EOR bundles these into a single monthly fee, which can make budgeting more straightforward.
Agility EOR is far more than just a service provider. We’re flexible, innovative and focused on outstanding client service. Supporting you every step of the way – and valuing your people as the cornerstone of success.
PAYE FAQs
Yes, if that employee earns £96 or more per week, or if you provide them with benefits or
expenses. There is no minimum employee threshold for PAYE registration.
You should register as soon as possible and submit a late FPS. HMRC may charge a late
filing penalty, but it is better to regularise the position than to continue operating without
registration.
You need payroll software that is recognised by HMRC. Free options are available for
businesses with fewer than 10 employees (HMRC's Basic PAYE Tools), but most employers
use commercial payroll software for accuracy and efficiency.
PAYE is the system for collecting income tax (and National Insurance). Income tax is the tax
itself. PAYE ensures that income tax is deducted at source, so employees do not have to pay
it separately.
The EOR registers as the employer with HMRC, operates PAYE on your behalf, and ensures
all deductions and submissions are made on time. You retain control over the employee's
work and pay, while the EOR handles the tax and compliance side.
If you are planning to hire in the UK and want to make sure your PAYE obligations are handled correctly, Agility EOR can help. Our team manages payroll, tax, and compliance for international employers, so you can focus on building your team without worrying about HMRC deadlines.