How to set up PAYE

Mar 21, 2023 | Business, Business tax

“What’s PAYE and how do I set this up?” This a good question to ask as a business owner.

You’ll need to ensure your staff are paid correctly and paying the right tax and National Insurance contributions. Even if you’re the only employee as a limited company director, this still is still the case.

This means using HMRC’s pay-as-you-earn (PAYE) system by yourself or via a third-party payroll provider.

Hiring a payroll professional (like us) will ensure you comply with all your HMRC obligations and save you and your team time.

But if you do decide to run it yourself, you’ll have a series of steps to follow.


1. Register as an employer 

Before the first payday, you must let HMRC know you’re taking on staff.

When you register as an employer, you’ll receive a login for PAYE Online: a service that lets you check and pay what you owe to HMRC and view your payment history, tax codes and other employee information.

Unless you’re exempt for specific reasons, you’ll be required to carry out payroll reporting online.


2. Choose your software

You’ll now need to decide which software to use. It will help you to:

  • record employees’ details
  • calculate pay and deductions
  • report to HMRC.

HMRC has a list of recognised payroll software – make sure you use one of these.


3. Collect and keep records

Keep records of payroll information, including what you pay your employees, the deductions you make, reports and payments to HMRC and more.

You must keep the records for at least three years after the end of each tax year, and they must show you have accurately reported to HMRC.


4. Notify HMRC about your staff

Whenever you make a new hire, tell HMRC about them by including their details on a full payment submission (FPS) the first time you pay them.


5. Record pay, make deductions and report 

Your PAYE scheme can now work. You’ll need to record the following into your software:

  • salary
  • wages
  • statutory payments (sick pay, parental pay)
  • holiday pay
  • certain expenses and benefits
  • tips, bonuses or commission

From this total, you’ll need to make certain deductions:

  • tax
  • employee’s National Insurance
  • student loan repayments
  • pension contributions
  • payroll giving
  • child maintenance

Make sure you calculate the employer’s National Insurance that you’ll pay, too.

You’ll then be able to produce payslips for your team and report their pay and any deductions to HMRC via the FPS form.


6. Pay tax

In the next tax month, you’ll be able to view the tax and National Insurance you owe on your FPS.

To claim your reductions for things like statutory pay, employment allowance or the construction industry scheme, your next step will be to send an employer payment summary by the 19th of the tax month after the one you reported for.

Ensure you send payment to HMRC by the 22nd (19th by post) of the month.


Talk to us

This blog is a simple overview of how to use a PAYE scheme. In our opinion, it’s always best to talk to an accountant. We’re here to help save you time and confusion.

Even if we help you get set up, and then you run it yourself, it will give you peace of mind that you’ve paid your staff correctly.

Get in touch with us today to talk about your PAYE scheme.

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