Many first-time company owners are surprised to learn of the requirement to register for PAYE. Even if you run your business as a sole director without employing any staff, you may still need to register as an employer with HMRC and set up PAYE.
This post outlines everything you need to know, including what PAYE is and how it works, how and when to register as an employer, and the PAYE tasks you will need to complete for HMRC.
What is PAYE?
PAYE stands for Pay As You Earn. HM Revenue and Customs (HMRC) uses the PAYE system to collect Income Tax, employee and employer National Insurance contributions (NIC), and various other deductions from employment and pension income.
Most employers are required to register for PAYE and operate the scheme as part of their payroll. By doing so, they are able to calculate and deduct tax from their employees’ pay ‘at source’ (i.e. as and when it is earned). This means that all necessary deductions are made before the employee receives their pay.
After each payday, employers are required to report their employees’ earnings and deductions to HMRC and pay their PAYE bill, either on a monthly or quarterly basis.
As a company director, you are classed as an employee of your company for PAYE registration purposes. Therefore, regardless of whether you hire any staff, you will most likely have to register your company for PAYE to report and pay tax on your director’s salary and expenses.
Under what circumstances is PAYE registration required?
You must register as an employer with HMRC and set up PAYE if your company does one or more of the following:
- Pays at least one employee (including any company directors) at least £123 per week (£533 per month, or £6,396 per year). This is the NIC Lower Earnings Limit for the 2023/24 tax year
- Employs someone who already has another job or receives a pension
- Provides expenses or benefits to any employees or directors
- Hires subcontractors for work in the construction industry
If none of these apply to any employees or company directors, you do not have to register as an employer or operate PAYE. However, you will still be required to keep payroll records, provide payslips, and abide by all relevant employment legislation.
What payments and deductions are made through PAYE?
The types of payments that employers can process through PAYE include:
- Salaries and wages
- Bonuses and commission
- Tips (with the exception of cash tips)
- Certain expenses
- Statutory Sick Pay (SSP)
- Statutory Maternity, Paternity, and Adoption Pay
- Redundancy pay
On these payments, employers must make a number of PAYE deductions through payroll each payday, including (where applicable):
- Income Tax
- Employees’ Class 1 National Insurance contributions
- Employees’ pension contributions
- Student Loan and Postgraduate Loan repayments
- Child maintenance payments
- Payroll Giving (Give As You Earn) donations
- Payments under an attachment of earnings order
- Repayments of a loan made by the employer to the employee
Employers must also pay Class 1 employer’s National Insurance contributions on any employee’s earnings above £175 per week (£758 per month).
How to register as an employer and set up PAYE
Most employers are required to set up PAYE online. You must do so before the first payday, but you cannot register as an employer or set up PAYE more than two months before you start paying people.
It may take HMRC a couple of weeks to process your registration and provide you with all of the required PAYE information, so you should try to complete this task in plenty of time.
Visit HMRC’s Register as an employer webpage, select ‘Start now’, and answer ‘Yes’ or ‘No’ to the following questions:
- Does at least one company director have a UK National Insurance number?
- Is the company an offshore employer outside the European Economic Area that doesn’t pay UK National Insurance?
- Over the next two months, will the company pay out any non-cash incentive awards?
The screen will then confirm whether you can register online.
If you can register online, select ‘Continue’ and sign in to your company’s Government Gateway account.
If you don’t have an account, select ‘Create sign in details’ at the bottom of the screen. This will allow you to set up a new business tax account for your company.
To do so, follow these steps:
- Enter your email address
- You should receive an email from HMRC with a ‘Confirmation Code’ – enter this code
- Provide your name
- Create a password
- Set up a recovery word (to use if you forget your password in the future )
- Your Government Gateway user ID will appear on screen – take a note of this
- Choose the type of account you need – select ‘Organisation’
- You will be taken to your new business tax account
Keep a note of your credentials and bookmark the Government Gateway sign-in page for future use. This is where you will sign in to access all of your company’s tax accounts, including Corporation Tax, VAT, and PAYE.
In your business tax account, you will be asked to add or select the tax you wish to register for. Choose ‘PAYE for Employers’.
Indicate that you are registering as a limited company, then provide your company’s Unique Taxpayer Reference (UTR).
The UTR is a 10-digit number that HMRC issues to all new companies. A letter containing your company UTR should arrive at your registered office address within three weeks of company formation.
Next, enter the first payday on which you plan to pay your employees, including any directors, and provide the following information on the registration form:
- Company name
- Trading name of the business, if different
- Registered office address
- Company telephone number
- Type of business – e.g. plumbing, hairdressing, graphic design
- Company registration number (you can find this on your certificate of incorporation)
- Name and National Insurance number of every director
- PAYE correspondence details
- How many people (including directors) your company employs or expects to employ in the current tax year
- Whether your company will be using any subcontractors in the construction industry
- Whether your company will be operating an occupational pension scheme
When the form is complete, submit the application online and download a copy for your records.
Within 15 days of registering as an employer, you will receive a letter containing your Employer PAYE reference and Accounts Office reference. Follow the instructions in the letter to complete your PAYE enrolment.
These references are important, because you will need them to set up payroll, submit reports, and send PAYE tax and National Insurance contributions to HMRC. Keep the letter safe with your other company records.
HMRC will then send you an Activation Code (or Activation Pin) in the post, usually within 10 days of completing your enrolment. You must use this code to activate your PAYE Online service within 28 days of the date on the letter.
Once activated, you can use your PAYE Online account to:
- check how much you owe HMRC
- pay your PAYE bill
- view your company’s payment history
- access tax codes and receive notices about your employees and directors – e.g. tax code notices (P6 and P9), student loan notices (SL1 and SL2), National Insurance verification notices (NVR and NOT)
- appeal penalties
- send expenses and benefits returns – e.g. P46 (car), P11D and P11D(b)
HMRC will also send you late reporting and late payment alerts through this account if you miss any PAYE deadlines.
When you cannot register online
Some companies are unable to register for PAYE online, including:
- companies with 10 or more directors
- companies in which no director has a UK National Insurance number
- offshore employers (including those on the Isle of Man) that do not pay UK National Insurance
- companies providing non-cash incentive awards as part of an employee pay package
- insurance companies and other businesses responsible for paying sick pay to the employees of more than one employer
These types of companies must register with HMRC by phone instead.
PAYE reporting requirements for HMRC
Under HMRC’s ‘Real Time Information’ (RTI) system, most employers are required to file all PAYE information electronically using RTI-compatible payroll software.
As an employer, your company must complete certain PAYE tasks for HMRC each tax month. A tax month runs from the 6th of one month to the 5th of the next.
On or before each payday, you must use your payroll software to:
- Record each employee’s pay – including their wages or salary and any other pay
- Calculate each employee’s deductions – including Income Tax and Class 1 National Insurance contributions
- Calculate the employer’s Class 1 National Insurance contributions that your company needs to pay on each employee’s earnings
- Create payslips for every employee (including any directors)
- Report all employees’ pay and deductions to HMRC on a Full Payment Submission (FPS)
You will need to include all of your employees in your PAYE scheme, even if they earn less than £123 a week.
If you don’t pay any of your employees in a tax month, you must send HMRC an Employer Payment Summary (EPS) instead of an FPS.
After each payday
In the tax month after each payday, you will be able to view what you owe (if anything) in your PAYE Online account from the 12th of each month. You will then need to:
- Send an Employer Payment Summary by the 19th of the month, if you need to claim any reduction (e.g. statutory pay) on what you owe HMRC from your FPS
- Sign in to your PAYE Online account to view the balance of what you owe – this information will be available within 2 days (or by the 14th if you send an EPS before the 11th)
- Pay your PAYE bill by the 22nd of the month (or the 19th if you pay by post) – you may receive a penalty if you pay your bill late
If your PAYE bill is normally less than £1,500 a month, HMRC may allow you to pay quarterly rather than monthly. Contact HMRC’s PAYE payment helpline to enquire.
What happens if I register for PAYE late?
HMRC may issue a penalty if a Full Payment Submission is late, if you don’t submit the expected number of FPS, or if you fail to send an Employer Payment Summary when you didn’t pay any employees in a tax month.
However, you are unlikely to face any immediate penalties if:
- you are a new employer and you submit your first Full Payment Submission within 30 days of paying an employee
- your Full Payment Submission is late, but all payments reported on the FPS are within 3 days of your employees’ payday (however, HMRC may contact you or issue a penalty if you make a habit of this)
- it is your first failure in the tax year to send a report on time (this does not apply to employers who register with HMRC as an ‘annual scheme‘)
If you are a new employer and you fail to send a report to HMRC within 120 days, your PAYE scheme will be closed.
Aside from the potential penalties your company may face, late payroll reports can affect employees’ income-related benefits, such as Employment and Support Allowance (ESA) and Universal Credit.
Cancelling your PAYE registration
If you stop being an employer, or all of your employees start earning less than £123 per week on a permanent basis, you need to tell HMRC as soon as possible.
To close your PAYE scheme, you must:
- send a final payroll return to HMRC – either a Full Payment Submission or an Employer Payment Summary
- deduct and pay any outstanding tax and NIC to HMRC within 17 days (or 14 days if you wish to pay by cheque)
- check the ‘Final submission because scheme ceased’ box
- enter the date on which you closed your PAYE scheme in the ‘Date scheme ceased’ box – you cannot enter a future date
- submit any expenses and benefits returns
- enter a leaving date on each employee’s payroll record
- provide a P45 to each employee on their last day – if your payroll software cannot produce them, you can order P45s from HMRC
If you start employing anyone in the same tax year or the next, you can restore your PAYE scheme by filing an FPS with your Employer PAYE reference.
If your company temporarily stops employing staff
You do not have to close your PAYE scheme if you temporarily stop employing staff. It will continue to run if employment stops for less than a whole tax year – for example, if your business operates on a seasonal basis. Additionally, you don’t have to issue P45s to your employees if you keep them on your payroll.
If you are not going to be paying staff for a period of three months or more, enter ‘Yes’ in the ‘Irregular payment pattern indicator’ on the last FPS that you file before you stop paying them.
You should file an EPS to tell HMRC if there are months when you do not pay staff. For any gaps in the current and last tax month, enter the relevant dates in the ‘No payments due’ fields. For gaps in the next 12 months, enter the relevant dates in the ‘Period of inactivity’ fields.
Thanks for reading
Registering as an employer and setting up PAYE is relatively straightforward. However, the administrative side of running payroll can be complex, so you may find it daunting and time-consuming if you have no relevant experience in this area.
When running a limited company, we would recommend appointing an accountant to help you with your PAYE responsibilities and company tax affairs. More often than not, it is money well spent, that will save you time and de-risk things for your business in the long run.
If you have any questions or would like to speak to us about setting up a company, please leave a comment below or get in touch with our company formation team.