What is PAYE on Payslips: Employer Guide

Employers have a legal duty to operate Pay As You Earn (PAYE) when paying employees, yet many organisations still receive routine questions from staff about what the PAYE figure on their payslip represents. Because PAYE is central to UK payroll compliance, HR teams must be able to explain deductions clearly and ensure they are calculated and reported correctly. Incorrect PAYE operation exposes employers to HMRC scrutiny, unpaid tax liabilities and penalties. PAYE also operates alongside the National Insurance system, so most employees will see both Income Tax and National Insurance deductions on their payslips.

What this article is about
This article provides a detailed explanation of what “PAYE” means when it appears on an employee’s payslip, how deductions are calculated, and the employer’s reporting and compliance obligations. It guides HR directors and employers through the statutory requirements for operating PAYE, the role of tax codes, the information that must be shown on payslips, and common problems such as incorrect codes and underpayments. It is designed to support employers in managing payroll queries, ensuring compliance with HMRC rules, and maintaining accurate records.

Section A: Understanding PAYE

Employers must understand the statutory basis and operational purpose of PAYE to ensure accurate payroll processing and compliance with HMRC requirements. PAYE is the mechanism HMRC uses to collect Income Tax and, in practice alongside National Insurance contributions, from employment income at source. For HR directors, the starting point is recognising PAYE as a legal obligation rather than an optional payroll feature. In broad terms, employers will be required to operate PAYE where an employee earns at or above the National Insurance lower earnings limit for the relevant tax year, or where the worker has another job, receives a pension or has other taxable income that HMRC needs to collect through the payroll.

1. What PAYE means in UK tax law

PAYE is established under the Income Tax (Pay As You Earn) Regulations 2003. It requires employers to deduct Income Tax from an employee’s earnings at the point of payment, in line with the tax code and other instructions issued by HMRC. The legislation sets out how deductions must be calculated, the information employers must obtain and maintain, and the reporting obligations when making payments to workers. PAYE ensures tax is collected throughout the year rather than by employees completing a full Self Assessment tax return, unless other circumstances require one. For most employees, PAYE will therefore be the primary method through which their Income Tax is collected.

Section A Summary

This section clarified the statutory footing of PAYE and its purpose as HMRC’s system for collecting Income Tax from employment income at source. It also highlighted the broad circumstances in which employers are legally required to operate PAYE, including where earnings reach at least the National Insurance lower earnings limit or where employees have other taxable income. This sets the foundation for the remainder of the article, which explains how PAYE deductions appear on payslips and the employer’s wider compliance duties.

Section B: PAYE Deductions on Payslips

Employers must provide employees with clear, itemised payslips that accurately show PAYE deductions. HR directors need to understand which elements must appear, how tax codes affect calculations and why PAYE amounts may vary each pay period. Providing accurate information reduces payroll disputes and demonstrates compliance with the Employment Rights Act 1996 and HMRC reporting rules. PAYE deductions also sit alongside National Insurance contributions, governed by the Social Security (Contributions) Regulations 2001, both of which must be shown clearly on the payslip.

1. What must appear on a payslip

Under section 8 of the Employment Rights Act 1996, employees must receive an itemised payslip showing gross pay, net pay and any variable or fixed deductions. Where PAYE is applied, the payslip must display the Income Tax deducted for that pay period. Employers must also show National Insurance deductions separately, in line with the Social Security (Contributions) Regulations 2001. If an employee queries the PAYE amount, the employer must be able to explain how it was calculated for that pay reference period. Employers must also provide a written explanation of any fixed deductions under section 9 if requested.

2. PAYE tax codes and how they shape deductions

PAYE deductions are determined primarily by the employee’s tax code. HMRC issues these codes to employers electronically, and they instruct payroll on how much tax-free allowance to apply before calculating Income Tax. Changes in personal circumstances, benefits in kind, underpayments or adjustments made by HMRC can result in updated codes. A correct tax code is essential to prevent over- or under-deductions. Where HMRC issues a new tax code, employers must apply it from the next available payroll run to ensure deductions remain accurate.

3. Variable PAYE deductions and employee queries

PAYE deductions can fluctuate for reasons such as overtime, bonuses, unpaid leave or mid-year tax code changes. Employees often question why deductions differ from one month to another. Employers should ensure payroll teams can explain how taxable pay is calculated and how cumulative and non-cumulative tax bases operate. On the cumulative method, PAYE takes account of all taxable pay and allowances from the start of the tax year. On the non-cumulative (Week 1/Month 1) basis, earlier pay periods are ignored, which can cause deductions to differ from the employee’s expectations.

Section B Summary

This section outlined the payslip requirements for displaying PAYE, how tax codes drive calculations and why PAYE deductions can vary. It explained the interaction between Income Tax and National Insurance on payslips and highlighted the significance of cumulative and non-cumulative tax calculations. It prepares HR professionals for the next section, which addresses employer responsibilities for applying PAYE correctly.

Section C: Employer Responsibilities under PAYE

Operating PAYE is not limited to deducting tax from employee earnings. Employers have ongoing legal duties that include correct calculation, timely reporting and maintaining compliant payroll systems. HR directors must ensure these obligations are met to avoid HMRC penalties, interest charges and reputational risk. These duties also extend to making timely payments of PAYE and National Insurance to HMRC, either monthly or quarterly depending on the employer’s liability.

1. Calculating PAYE correctly

Employers must calculate PAYE in accordance with the Income Tax (Pay As You Earn) Regulations 2003 and HMRC’s PAYE guidance. This requires applying the correct tax code, assessing taxable pay for the period and deducting Income Tax at the appropriate rates. Employers must also account for benefits in kind processed through payroll, adjustments instructed by HMRC and any cumulative position carried forward from earlier in the tax year. Errors in calculation can create underpayments that become the employer’s liability unless HMRC issues a Regulation 72 direction allowing recovery from the employee where the employer took reasonable care.

2. Real Time Information (RTI) reporting

Employers must report PAYE deductions to HMRC through Real Time Information (RTI). This involves submitting a Full Payment Submission (FPS) on or before the date employees are paid. If adjustments, corrections or late reporting are required, the employer must use an Employer Payment Summary (EPS). Late filing penalties may apply where multiple deadlines are missed, depending on the size of the PAYE scheme. HMRC may also issue Generic Notification Service (GNS) warnings through the employer’s PAYE Online account where reporting or payment discrepancies are identified.

3. Record-keeping and compliance duties

Employers must keep payroll records for at least three years, including payslips, tax code notices, RTI submissions and details of payments made to HMRC. Accurate records are essential for audits and for resolving employee queries. HMRC has the power to review payroll systems, examine records and issue compliance notices or penalties if the employer has failed to follow PAYE rules. Employers must also ensure PAYE and National Insurance are paid to HMRC on time: electronically by the 22nd of the month, or by the 19th if paying by post. Small employers with average monthly PAYE liabilities under £1,500 may pay quarterly.

Section C Summary

This section set out the employer’s legal responsibilities when operating PAYE, emphasising correct calculation, real-time reporting, accurate record-keeping and timely payment duties. It highlighted the role of RTI in monitoring compliance and the importance of responding to HMRC warnings. These underpin payroll accuracy and reduce the risk of enforcement action.

Section D: Common Employer Issues with PAYE

Even with compliant payroll systems, PAYE problems arise frequently. HR directors must be able to identify the cause of errors early and take corrective action to reduce financial exposure. Most issues occur due to incorrect tax codes, misapplied deductions or problems during employee onboarding or exit. Employers must also be aware of how underpayments are treated by HMRC, as liability does not always fall on the employee.

1. Incorrect tax codes and HMRC updates

Incorrect tax codes remain the most common source of PAYE discrepancies. Employers must apply tax codes issued by HMRC, even where an employee disputes the correctness of the code. Employees must contact HMRC directly to resolve coding errors. Employers must ensure payroll receives tax code updates promptly and that outdated codes are not applied inadvertently. Failure to use the most recent code can lead to cumulative errors that require correction later in the tax year.

2. Over-deductions and under-deductions

If the wrong code is used or taxable pay is miscalculated, employers can inadvertently deduct too much or too little tax. Under-deductions can become the employer’s liability unless HMRC issues a Regulation 72 direction confirming that the employer took reasonable care and that the error was caused by the employee’s actions or omissions. Over-deductions may require a refund through payroll. Employers must identify errors quickly and correct them through the next payroll or via RTI adjustments to minimise employee impact and financial exposure.

3. Starter and leaver PAYE problems

New starters often trigger PAYE errors if their Personal Details Checklist (formerly the P46) or P45 information is incorrect or incomplete. Missing pay and tax details can result in emergency tax codes. For leavers, payroll must ensure that final deductions are calculated correctly and that a P45 is issued “without unreasonable delay” in accordance with the PAYE Regulations. Inaccurate or late processing can affect an employee’s tax position for the remainder of the year and may require corrective action through HMRC.

Section D Summary

This section examined common PAYE issues and how employers should respond. It highlighted the significance of tax code accuracy, the employer’s potential liability for under-deductions and the legal requirement to issue a timely P45. Recognising these patterns helps HR teams prevent recurring mistakes and manage employee queries effectively.

FAQs

Is PAYE the same as Income Tax?
PAYE is the system used to collect Income Tax from employee earnings. The tax itself is Income Tax, but PAYE is the method through which employers deduct and report it to HMRC.

What if an employee disputes their PAYE deduction?
Employers should check that the correct tax code and taxable pay have been applied. If the calculation is correct, the employee must contact HMRC because only HMRC can amend a tax code or adjust an employee’s tax position.

Does PAYE change during the tax year?
Yes. HMRC can update tax codes at any time due to changes in personal allowances, benefits, underpayments or updated information. Employers must apply new codes as soon as they are received.

How should employers handle emergency tax codes?
Emergency tax codes should be applied immediately when required, usually where no P45 information is available. Once HMRC issues a corrected code, employers must update payroll and apply the new code from the next pay period.

What PAYE records must employers keep?
Employers must keep payroll records for at least three years, including payslips, RTI submissions, tax code notices and evidence of payments made to HMRC.

Conclusion

PAYE is a core element of payroll compliance and an essential part of an employer’s statutory duties. Understanding what PAYE represents on a payslip, how deductions are calculated and what HMRC expects from employers reduces the risk of errors, disputes and enforcement action. HR directors must ensure tax codes are applied correctly, payroll systems remain up to date and Real Time Information submissions are completed accurately for every pay period.

Clear communication with employees about how PAYE works helps reduce confusion and prevents unnecessary queries. By maintaining accurate records, monitoring tax code updates and ensuring compliant payroll processes, employers can meet their legal obligations and support a transparent approach to pay.

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