PAYE = Pay As You Earn. The method by which HMRC collects Income Tax and National Insurance from your wage. As a small business owner or IT contractor, PAYE is not something to be scared of, it is fairly straight-forward once the functions of the sections have been understood.
When you need to register for PAYE
You will usually need to register as an employer and operate PAYE if you pay someone:
Above the Lower Earnings Limit (even if no tax is due), or
At or above the Individual Income Tax/National Insurance threshold, and
An employer (e.g., they have another job) or pensioner and HMRC needs to consider total income.
PAYE could apply even if you only use one person working for you part-time.
What PAYE actually involves
Running PAYE means you:
Track what you are paying each employee (wages, overtime, bonuses)
Deductions for Income Tax and National Insurance are worked out
Cover employer liabilities i.e. Employer National Insurance (where applicable)
Submit payroll output onto HMRC Real Time Information (RTI)
Set aside required funds (usually paid monthly, but some small employers can pay quarterly)
To put it more plainly: you are providing a bridge between your employee and HMRC.
Requirements for running PAYE efficiently
Nearly all small business owners rely on payroll software (or a bookkeeper/accountant) to prevent errors. For Accountants Bath, contact https://chippendaleandclark.com/accountants-near-me/bath
You’ll typically need:
Last Name, City, DOB
A start checklist or P45 (to ensure the correct tax code is used)
Pay frequency (weekly/monthly)
Transparent way of tracking the hours, holiday and sick pay
PAYE pitfalls (and how to avoid them)
Incorrect Tax Code – always take the correct starter info
To submit RTI in the period you are missing – Reminder on or before pay day and do your submission.
Ignoring employer costs: include budget for Employer’s NI and pension contributions if applicable.
There is no record-keeping: Store and organise paystubs as well payroll information.
Do directors need PAYE?
If you are the director of a limited company and receive any type of salary (even if it is small), this fact has to be reported via PAYE. The correct structure all depends on your overall scenario, and how you draw money from the business.