PAYE, which stands for Pay As You Earn, is the United Kingdom's system for collecting income tax and National Insurance contributions directly from employee wages. Instead of employees paying a large tax bill at year-end, employers calculate and deduct the correct amount from each paycheck and send it to HM Revenue and Customs (HMRC).
How PAYE Works
Every employee has a tax code that tells their employer how much tax-free income they can earn before deductions begin. Based on this code and the current tax rates, employers calculate the correct deductions each pay period. The system is designed so that by the end of the tax year (which runs April to April in the UK), employees have paid roughly the right amount of tax without needing to file returns in most cases.
What PAYE Covers
- Income Tax at basic, higher, and additional rates
- National Insurance contributions (both employee and employer portions)
- Student loan repayments if applicable
- Pension contributions under auto-enrollment
- Any payroll deductions for benefits in kind
Employer Obligations Under PAYE
UK employers must register with HMRC as an employer before their first employee starts. They must report payroll information in real-time through a system called RTI (Real Time Information), sending details to HMRC every time they run payroll. Employers also must provide employees with payslips showing all deductions and issue P60 forms at year-end summarizing annual pay and deductions.
PAYE for International Companies
If you are a foreign company hiring in the UK, you need to either set up as a UK employer and operate PAYE directly, or use an Employer of Record to handle PAYE compliance on your behalf. The EOR becomes the official UK employer, manages the PAYE process, and ensures all deductions and filings are handled correctly according to HMRC requirements.