Payroll and PAYE

Pay As You Earn (PAYE) is the system HMRC uses to collect Income Tax and National Insurance from employees' earnings at source. If you employ anyone, including yourself as a director drawing a salary, you must operate a payroll and report to HMRC in real-time. Since 2013, all employers must use Real-Time Information (RTI) reporting, which means you submit payroll data to HMRC on or before each pay day. This guide covers how to set up and run payroll, the forms you need to file, deadlines, and what happens if things go wrong.

Registering as an Employer

Before you can run payroll, you must register with HMRC as an employer. Do this online at GOV.UK at least four weeks before your first pay day. You will receive an employer PAYE reference number — a three-digit tax district number followed by a forward slash and a reference (e.g. 123/AB45678). You will also need your Accounts Office reference to pay HMRC. Registration is free, and HMRC will send you a new employer pack with guidance on your responsibilities.

RTI: FPS and EPS

Every pay day, you must submit a Full Payment Submission (FPS) to HMRC. The FPS contains each employee's pay, deductions, tax code, and payroll ID. You must submit it on or before the day you pay your employees. If you do not process any payments in a tax month, submit an Employer Payment Summary (EPS) to tell HMRC that no payments were made. The EPS is also used to claim certain statutory payments and the Employment Allowance. Late or missing FPS submissions can result in automatic penalties: a late return within three days of the due date incurs a penalty starting from £100, escalating based on the number of employees.

Payroll Software

You cannot submit RTI data through a spreadsheet or manually — you must use HMRC-recognised payroll software. HMRC provides a free Basic PAYE Tools (BPT) package for employers with nine or fewer employees. For larger payrolls, commercial options include Xero, QuickBooks, Sage, MoneySoft, and BrightPay. Your software will calculate tax and NIC automatically based on each employee's tax code and pay. Most accounting packages include integrated payroll modules that make end-to-end processing seamless.

Tax Codes for Employees

Each employee has a tax code that tells the payroll software how much tax-free pay they are entitled to in the tax year. The most common code for 2025/26 is 1257L, giving a tax-free Personal Allowance of £12,570. Other codes include BR (all income taxed at basic rate), D0 (all at higher rate), and K codes (used when deductions exceed allowances). HMRC issues tax codes through the Tax Code Notice (P9) form, which your payroll software should apply automatically if you use HMRC's PAYE service. An incorrect tax code can mean an employee pays too much or too little tax — always check the code at the start of each tax year and when an employee joins.

Payroll Deadlines

• Each pay day: Submit FPS to HMRC (on or before the day you pay).
• By 19th of each month: Pay HMRC any PAYE and NIC due for the previous tax month (or 22nd if paying electronically).
• By 19 March: Submit final FPS of the tax year (to indicate it is the last payroll run).
• By 31 May: Issue P60 to each employee who was employed on 5 April.
• By 6 July: Submit P11D (benefits and expenses) and P11D(b) (Class 1A NIC) to HMRC.
• By 6 July: Issue P11D copies to employees.

Penalties for Non-Compliance

HMRC operates an automatic late-filing penalty regime for payroll. If your FPS is late, you receive a penalty based on the number of employees: £100 for 1–9 employees, £200 for 10–49, £300 for 50–249, and £400 for 250 or more. After four consecutive late returns, penalties double. Late payment of PAYE and NIC also attracts interest at the Bank of England base rate plus 2.5%. If you persistently fail to file on time, HMRC may issue a notice requiring you to file on a specified schedule. In serious cases, HMRC can also levy penalties of up to £3,000 for each incorrect return.

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