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What Is PAYE?
PAYE (Pay As You Earn) is the UK system through which employers withhold Income Tax and National Insurance contributions directly from an employee's salary and remit them to HM Revenue and Customs (HMRC), typically each pay period. It is the primary mechanism by which the UK collects tax from employment income.
PAYE isn't a separate tax; it's a collection method. It withholds two distinct things, Income Tax and National Insurance, based on progressive rate bands and an employee's individual tax code.
PAYE at a Glance
| Attribute | Description |
|---|---|
| Personal Allowance (2026/27) | £12,570, tax-free |
| Basic Rate | 20% on income up to £50,270 |
| Higher Rate | 40% on income up to £125,140 |
| Additional Rate | 45% above £125,140 |
| Reporting Requirement | Monthly Real Time Information (RTI) submissions to HMRC |
| Employer Registration | Required before the first UK employee's start date |
Why Does It Matter?
Every UK employer must register for PAYE and correctly withhold both Income Tax and National Insurance from each employee's pay. Because the UK uses individual tax codes to determine exactly how much tax-free allowance applies to each employee, getting this wrong, especially for new hires or those with unusual circumstances, is a common and costly payroll error.
When Is It Used?
PAYE obligations apply whenever a company:
- Hires its first employee in the UK and must register with HMRC.
- Runs monthly payroll and needs to withhold the correct tax and National Insurance based on each employee's tax code.
- Submits monthly Real Time Information reports to HMRC as part of standard payroll compliance.
A Canadian marketing agency hires its first UK employee at £45,000 gross annual salary. Before the employee's start date, the company registers for PAYE with HMRC, then each month withholds Income Tax according to the employee's tax code and progressive rate bands, alongside employee National Insurance, and files the required Real Time Information submission.
Common Misconceptions
No. It withholds Income Tax on a progressive scale, plus separate National Insurance contributions, based on an individual tax code.
No. Foreign companies employing staff who work in the UK generally must register for PAYE, regardless of where the parent company is based.
No. Employers must file monthly Real Time Information reports and keep tax codes updated as HMRC issues changes.
No. Genuinely self-employed contractors manage their own tax through self-assessment; PAYE only applies to employees (and certain contractors caught by IR35).
PAYE is the UK's core payroll tax withholding system, requiring employers to deduct Income Tax and National Insurance from salary and report to HMRC regularly. Any company hiring in the UK needs to register for PAYE and build accurate, compliant payroll processes from the outset.
Hiring your first UK employee?
We'll help you register for PAYE and run compliant UK payroll from day one.
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