1.

Introduction to PAYE
As an employer, you normally have to operate PAYE as part of your payroll. PAYE is HM
Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from
employment.
You’re exempt from PAYE if none of your employees is paid £111 or more a week, gets
expenses and benefits, has another job or gets a pension. However, you must keep payroll
records.

Payments and deductions

When paying your employees through payroll you also need to make deductions for PAYE.

Payments to your employees

Payments to your employees include their salary or wages, as well as things like any tips or
bonuses, or statutory sick or maternity pay.

Deductions from their pay

From these payments, you’ll need to deduct tax and National Insurance for most employees.
Other deductions you may need to make include student loan repayments or pension
contributions.

Reporting to and paying HMRC

Reporting pay and deductions

If you run payroll yourself, you’ll need to report your employees’ payments and deductions
to HMRC on or before each payday.
Your payroll software will work out how much tax and National Insurance you owe,
including an employer’s National Insurance contribution on each employee’s earnings above
£153 a week.
You’ll need to send another report to claim any reduction on what you owe HMRC (eg for
statutory pay).

Paying HMRC

You’ll be able to view what you owe HMRC, based on your reports. You then have
to pay them, usually every month.
If you’re a small employer that expects to pay less than £1,500 a month, you can arrange to
pay quarterly - contact HMRC’spayment enquiry helpline.

Other things to report

As part your regular reports, you should tell HMRC when a new employee joins and if an
employee’s circumstances change (eg they reach State Pension age or become a director).
You have to run annual reports at the end of the tax year - including telling HMRC about any
expenses or benefits.
 4. Keeping records
You must collect and keep records of:
 what you pay your employees and the deductions you make
 reports and payments you make to HM Revenue and Customs (HMRC)
You’ll also need records of any employee leave and sickness absences,tax code notices or
taxable expenses or benefits.
Your records must show you’ve reported accurately, and you need to keep them for 3 years
from the end of the tax year they relate to.HMRC may check your records to make sure
you’re paying the right amount of tax.

Real Time Information (RTI) main changes and the effects on CIS
From 6 April 2013 employers started reporting PAYE information to HM Revenue &
Customs (HMRC) in real time (sometimes called Real Time Information or RTI).
Reporting PAYE in RTI means that you send HMRC data about tax, National Insurance
contributions (NICs) and other deductions using payroll software on or before each earnings
or pension payment is made, rather than at the end of the tax year.
The information you send will tell HMRC how much you should pay. This will make it easier
for you to pay the right amount each time, and help avoid building up debt. It will also
support Universal Credit which is being introduced from October 2013.
On this page:
 PAYE returns
 CIS employers
 Limited companies with excess CIS deductions
PAYE returns
The PAYE employers annual return form P35 no longer exists.
There are new PAYE Returns, which are sent electronically to HMRC using payroll software.
Amongst the key forms are:
 The Full Payment Submission, known as an FPS, made to HMRC on or before the
date of payment to the employee. It records the ‘year to date’ figures of Pay, Tax and
NICs due for each employee and also the totals for that particular pay period.
 The Employer Payment Summary, known as an EPS, used to recover statutory
payments (Sick/Maternity/Paternity/Adoption pay) and to report a NICs holiday. The EPS
must also be used to report if a nil payment to HMRC is due for the month (in which case
no FPS will be required).
The form P11D (b) return of benefits/expenses due by 19 July remains unchanged.
For an overview of the changes that reporting PAYE in real time will bring, see our guide
'What's changed - PAYE in real time'.
 Understanding your employees' tax codes
1. Overview
You put an employee’s tax code into your payroll software to work out how much tax to
deduct from their pay throughout the year.
There’s a separate guide on tax codes if you’re an employee.

What you need to do

When you take on a new employee, you normally work out their tax code by using their P45.
The code will usually be made up of severalnumbers and a letter, such as 564L.
You usually need to update your employee’s tax code at the start of a new tax year. If the tax
code changes during the year, HM Revenue and Customs (HMRC) will email you - you
should update your payroll records as soon as possible.

Tax code 1000L

The most common tax code for tax year 2014 to 2015 is 1000L. It’s used for most people
born after 5 April 1948 with 1 job and no untaxed income, unpaid tax or taxable benefits (eg
company car).
1000L is also the emergency tax code, which is sometimes used if your employee doesn’t
have a P45.
Your employer or pension provider uses your tax code to work out how much tax to take
from your pay or pension.
HM Revenue and Customs (HMRC) works out your tax code and sends it to your employer
or pension provider.
Usually a tax code is several numbers and a letter.
Most people born after 5 April 1948 with one job have 1000L as their tax code for the 2014
to 2015 tax year.
Tell HMRC if you think you’re paying too much or too little tax. IfHMRC agrees they’ll
adjust your tax code so that you:
 get your full tax-free Personal Allowance
 pay the right amount of tax for all of your income, spread over a year

More than one tax code

If you’ve only got one employer or pension, you’ll have one tax code.
But if you get income from more than one employer or pension provider, each will usually
use a different tax code.
Tell HMRC if you think you’re paying too much or too little tax and have more than one tax
code.
 Where to find your tax code
You can get your tax code from:
 payslips from your employer or pension provider
 P45 from an employer if you leave a job
 P60 from your employer at the end of each tax year
 a PAYE Coding Notice - you may get one by post or you can check using HMRC’s
Self Assessment online service if you’re registered
Your tax code doesn’t tell employers or pension providers how much you earn - it only tells
them how much tax they need to take from payments they make to you.

2. Numbers in your tax code: what they mean

The numbers in your tax code tell your employer or pension provider how much tax-free
income you get in that tax year.
1. HM Revenue and Customs works out your tax-free Personal Allowance.
2. Income that you haven’t paid tax on (eg untaxed interest or part-time earnings) and
the value of any benefits from your job (eg a company car) are added up.
3. The income that you haven’t paid tax on is taken away from your allowances. What’s
left is the tax-free income you’re allowed in a tax year.
4. This amount is divided by 10 and added to the letter for your circumstances.
The process is different if you have the letter ‘K’ in your tax code.
3. Letters in your tax code: what they mean
The letter in your tax code helps your employer or pension provider to work out how much
tax to take from your wages or pension.

Lette What it means

r

L You’re entitled to the basic tax-free Personal Allowance

P You were born between 6 April 1938 and 5 April 1948 and entitled to your full tax-
freePersonal Allowance

Y You were born before 6 April 1938 or over and entitled to your full tax-free Personal
Lette What it means
r

Allowance

T Your tax code includes other calculations to work out your Personal Allowance (eg
it’s been reduced because your income is over specific limits)

0T Your Personal Allowance has been used up, or you’ve started a new job and don’t
have a form P45, or you didn’t give your new employer the details they need to give
you a tax code

BR All your income from this job or pension is taxed at the 20% basic rate (usually used
if you’ve got more than one job or pension or when you start your first job and your
employer is waiting for a tax code)

D0 All your income from this job or pension is taxed at the 40% higher rate (usually used
if you’ve got more than one job or pension)

D1 All your income from this job or pension is taxed at the 45% additional rate (usually
used if you’ve got more than one job or pension)

NT You’re not paying any tax on this income

 If your tax code has a ‘K’ at the beginning
Tax codes with ‘K’ at the beginning mean that you have income that isn’t being taxed another
way and it’s worth more than your tax-free allowance. For most people, this happens when
you’re:
 paying tax you owe from a previous year through your wages or pension
 getting State benefits that you need to pay tax on (like the State Pension)
 getting benefits from work that you must pay tax on (like a company car or health
insurance)
Your employer or pension provider takes the tax due on the income that hasn’t been taxed
from your wages or pension - even if another organisation is paying the untaxed income to
you.
Employers and pension providers can’t take more than half your pre-tax wages or pension
when using a K tax code.

If your tax code has ‘W1’ or ‘M1’ at the end

W1 (week 1) and M1 (month 1) are emergency tax codes. This means your tax is based only
on what you are paid in the current pay period, not the whole year.
Which code you get depends on whether you are paid weekly or monthly.
They appear at the end of your tax code, eg ‘577L W1’ or ‘577L M1’
You will always start a new tax year with a normal tax code, not an emergency one.
 When your tax code changes
The most common reasons for a tax code change are if you start or stop getting:
 benefits from your job that you need to pay tax on
 expenses from work that you can reclaim tax for
 income that isn’t being taxed (like rental income)
 State benefits (including the State Pension) that you need to pay tax on
Your tax code will also change if you need to pay tax due from previous years through your
wages or pension.
You may be temporarily put on an emergency tax code if you change jobs.

What happens when your tax code changes

1. You, your employer or your pension provider tells HM Revenue and Customs
(HMRC) about the change.
2. HMRC works out what to do with your tax code (or tax codes if you’ve got more than
one).
3. HMRC sends a new tax code to your employer or pension provider. Once they’ve got
it, they’ll use it to work out how much tax to take from your payments from the next time
they pay you.
4. HMRC sends you a ‘PAYE Coding Notice’ which explains the changes
 PAYE forms: P45, P60, P11D
1. P45
You’ll get a P45 from your employer when you stop working for them.
Your P45 shows how much tax you’ve paid on your salary so far in the tax year (6 April to 5
April).
A P45 has 4 parts (Part 1, Part 1A, Part 2 and Part 3).
1. Your employer sends details for Part 1 to HM Revenue and Customs (HMRC) and
gives you the other parts.
2. You give Part 2 and 3 to your new employer (or to Jobcentre Plus if you’re not
working).
3. Keep Part 1A for your own records.
By law your employer must give you a P45 - ask them for one.
Use HMRC’s tax checker if you think you might have paid too much tax.

You don’t have a P45

You won’t have a P45 if you’re starting your first job or you’re taking on a second job. Your
employer will need to work out how much tax you should be paying on your salary.
They may use a ‘Starter Checklist’ to collect the information, or may collect it another way.
The Starter Checklist (replaced P46???) has questions about any other jobs, benefits or
student loans you have. It helps your employer work out your correct tax code before your
first payday.
2. P60
Your P60 shows the tax you’ve paid on your salary in the tax year (6 April to 5 April).
If you’re working for your employer on 5 April they must give you a P60. They must provide
this by 31 May, on paper or electronically.
You’ll need your P60 to prove how much tax you’ve paid on your salary, eg:
 to claim back overpaid tax
 to apply for tax credits
 as proof of your income if you apply for a loan or a mortgage
3. P11D
Your employer will send a P11D to HM Revenue and Customs (HMRC) if you get any
‘benefits in kind’ (eg company cars or interest-free loans).
The P11D records how much each benefit is worth.
Your employer will send HMRC a P11D if your earnings, including the value of company
benefits, are at least £8,500 in the tax year (6 April to 5 April).
Your employer will usually give you a copy of the P11D. They don’t have to by law, but they
must tell you what’s on it.
Forms
 P11D (PDF, 136KB)

If you're an employer, use the paper form P11D at the end of the tax year to report
expenses and benefits you've provided to company directors or to employees earning
£8,500 or more. You must also provide a copy to the director or employee.
P9D - Return of expenses payments and income from which tax cannot be deducted (PDF,
104K)
Use the paper form P9D if you're an employer who has provided expense payments or
benefits to an employee earning below the P11D threshold of £8,500.
P11D(b) - Return of Class 1A National Insurance contributions
Use this paper form to tell HMRC the amount of Class 1A National Insurance contributions
due on the expenses and benefits provided to employees.
As an employer, you might need to report any expenses or benefits you provide to
employees. You may also need to pay tax and National Insurance on them.
As an employer providing accommodation for your employees, you have certain tax,
National Insurance and reporting obligations.
As an employer buying, selling or giving assets to your employees, you have certain tax,
National Insurance and reporting obligations.
As an employer providing bonus payments to your employees, you have certain tax, National
Insurance and reporting obligations.
This includes both cash and non-cash bonuses.
As an employer providing company cars and fuel to your employees, you have certain
National Insurance and reporting obligations.
4. Lost PAYE forms

Lost P45
You can’t get a replacement P45.
Instead, your new employer may give you a ‘Starter Checklist’ or ask you for the the relevant
details about your finances to send to HM Revenue and Customs (HMRC).

Lost P60
You can get a replacement P60 from your employer.

P11D
You can usually get a copy of the P11D from your employer. If they can’t give you one, you
can contact HMRC for a copy.

1. Overview
 You pay National Insurance contributions to qualify for certain benefits including the State
Pension.
You pay National Insurance if you’re:
 16 or over
 an employee earning above £153 a week
 self employed and making a profit over £5,885 a year (unless you get an exception)
The exact amount you pay depends on:
 how much you earn
 whether you’re employed or self-employed
You may also want to pay voluntary contributions to make up for gaps in your National
Insurance record. For example, you can have a gap because you weren’t working and didn’t
get any state benefits.

he class you pay depends on your employment status or if you have a gap in your National
Insurance record.

National Who pays

Insurance class

Class 1 Employees earning more than £153 a week and under state pension age -
they’re automatically deducted by your employer

Class 1A or 1B Employers pay these directly themselves on their employee’s expenses or

benefits

Class 2 Self-employed people - you don’t have to pay if you earn less than
£5,885 and apply for a ‘small earnings exception’

Class 3 Voluntary contributions - you can pay them to fill or avoid gaps in your
 National Who pays
Insurance class

National Insurance record

Class 4 Self-employed people earning profits over £7,956

 National Insurance contributions - how much you pay

You’re employed
You pay Class 1 National Insurance contributions. The rates for most people are:
 12% on your weekly earnings between £153 and £805
 2% on any weekly earnings over £805
You’ll pay less if you’re in a contracted out workplace pension or you’re a married woman or
widow with a valid ‘certificate of election’.
You pay National Insurance with your tax. Your employer will take it from your wages
before you get paid. Your payslip will show your contributions.
If you’re a director of a limited company, you may also be your own employee and pay
National Insurance Class 1 through your PAYEpayroll.

You’re self-employed
You’re responsible for paying your own National Insurance. How much you pay depends on
your profits.

Rates for the 2014 to 2015 tax year

Annual profits Class 2 Class 4

Up to £5,885 £0 but only if you get an £0

exception
Annual profits Class 2 Class 4

£5,885 - £2.75 a week £0

£7,956

£7,956 - £2.75 a week 9% of profits from £7,956 up to £41,865

£41,865

More than £2.75 a week 9% of profits from £7,956 up to £41,865 and

£41,865 2% over that amount

You must arrange payments for Class 2 yourself.

Class 4 contributions will be paid with your Income Tax. You can set up your payments
when you register for Self Assessment or change how you pay.

You’re employed and self-employed

You might be an employee but also do self-employed work. In this case your employer will
take care of your Class 1 payments and you have to pay Class 2 and 4 payments for your self-
employed work.
How much you pay when employed and self-employed depends on your combined income
from all your jobs.
Your can defer (delay) paying your National Insurance if you’re not sure what your earnings
will be and you don’t want to overpay.
What National Insurance is for
National Insurance contributions count towards the benefits in the table.
Benefit Class 1: Class 2: self- Class 3: voluntary
employees employed contributions

Basic State Pension Yes Yes Yes

Additional State Pension Yes No No

New State Pension Yes Yes Yes

Contribution-based Jobseeker’s Yes No No

Allowance

Contribution-based Employment Yes Yes No

and Support Allowance

Maternity Allowance Yes Yes No

Bereavement benefits Yes Yes Yes

Class 4 contributions paid by self-employed people with a profit over £7,956 don’t count
towards state benefits.

Employer returns: RTI submissions: introduction

From April 2012, an employer who is within RTI will have the ability to submit the
following:
 Employer Alignment Submission (EAS)
Full Payment Submission (FPS)
Employment Payment Summary (EPS)
Earlier Year Update (EYU)
NINO Verification Request (NVR) 

Employer Alignment Submission (EAS)

Every PAYE scheme must pass through a data alignment process as the first step of moving
onto Real Time Information (RTI). It is a means for employers to send in details of active
employments to HMRC (along with details of starters and leavers in the current tax year) so
that HMRC and employer data can be aligned.
It ensures that the employee details held on an employer payroll match with our HMRC
systems and that payment information matches immediately to the correct employee record,
once the employer starts to submit their RTI submissions.
To enable this alignment to take place, employers with 250 or more employees or those who
administer on two or more payroll systems will be required to complete an Employer
Alignment Submission (EAS). All other employers will do their alignment when they submit
their First Full Payment Submission (FPS).
Although only large employers are required to submit an EAS prior to their first FPS, other
employers also have the option to make an alignment submission prior to their first FPS.
Some payroll software providers are advising all of their software users to submit an EAS
when they migrate to RTI.

Full Payment Submission (FPS)

Employers will submit a Full Payment Submission (FPS) each time they pay an employee,
whether this is weekly, monthly or any normal payroll date. The employer must provide the
following mandatory information in each FPS

 Employer information (HMRC office number, PAYE reference, Accounts Office

reference and the income tax year to which the submission relates)
 Scheme information - in particular when an employer has ceased
 Employee information (title, surname or family name, forename, second forename,
date of birth, gender, full address including postcode)

Note: The entry of the employee’s full address is only mandatory for new starters and where
the NINO is unknown. Where the NINO is unknown, the employer must continue to provide
the employee’s address on every subsequent FPS until able to provide the NINO.

 Payroll ID - current payroll ID (including old payroll ID if any changes made)

Notes: 
1 If the Payroll ID / works number on NPS has changed the employer must complete the
 . FPS to show the old Payroll ID, new Payroll ID and set the Payroll ID change indicator.
Where this is done it will be treated as a works number update.
2 If the employer only changes the Payroll ID which has been previously provided on the
. FPS, without completing the old Payroll ID and Payroll ID indicator, it will result in a
new employment being set up on NPS.

 Employment starter information - for new employees including start dates

 Employment leaver information - date the employment ended including payment after
leaving

There will be other information contained within the FPS including full details relating to
NIC and deductions made by the employer such as NICs, tax, student loan repayments and
Statutory Payments made, for example Statutory Sick Pay and Statutory Maternity Pay.

Employment Payment Summary (EPS)

Employers will use the Employer Payment Summary (EPS) to report

 Statutory Payments recovered (This will no longer be viewable for tax years 2014-15
onwards)
 NIC Compensation on Statutory Payments
 CIS Deductions suffered
 Deductions an employer is entitled to make under the Regional Employer NICs
Holiday for New Businesses (This will no longer be viewable for tax years 2014-15 onwards)
 Details of any advance received from HMRC

For tax years 2014-15 the following will also be viewable

 Account Name
 Account Number
 Branch Sort Code
 Building Society Reference (only visible where there is an entry on the submission)

This submission will allow HMRC to offset these against any payments due.
The submission will also include

 Employer information (HMRC office number, PAYE reference, Accounts Office

reference and the income tax year to which the submission relates)
 Payment information for a pay period
 Scheme information - in particular where an employer has ceased

Note: If no payments are made within a pay period and no FPS is submitted, the employer
will submit an EPS to show that no return or payment is due for that pay period.
 Final submission for the tax year
An employer must complete and submit an FPS whenever they make a payment to an
employee. When an employer submits a final RTI submission for the tax year on or before 5
April, whether it is an FPS or EPS, they must indicate that it is their ‘Final Submission’ for
the tax year and complete the Questions and declaration statement.
Top of page

Earlier Year Update (EYU)

After the 19 April, following the end of the tax year, an employer cannot submit an FPS for
the closed year. Where an employer needs to submit FPS details for a previous year or
amend year to date FPS figures for a previous year they can only do this by submitting an
EYU. The EYU must only show the difference between the year to date figure on the final
FPS and what the figure should be.
If an EYU is received for an employer record that does not already have a joining date EBS
will set a joining date derived as 5 April within the tax year to which the EYU refers.
Note: This will not trigger the alignment process.
Where a joining date has been derived from an EYU the first FPS will start the alignment
process, but it will not change the joining date.
However, where a joining date has been derived from an EYU and another EYU is received
relating to a tax year earlier than the joining date tax year the date will be changed to 5 April
within the tax year to which the earlier EYU refers.
The employer must provide the following mandatory information in each EYU

 Employer information (HMRC office number, PAYE reference, Accounts Office

reference and the income tax year to which the submission relates)
 Employee information (title, surname or family name, forename, second forename,
date of birth, gender, full address including postcode)

Note: The entry of the employee’s full address is only mandatory for a new starter that has
not appeared on a previous FPS or where the NINO is unknown. Where the NINO is
unknown, the employer must continue to provide the employee’s address on every
subsequent EYU until they are able to provide the NINO.

 Payroll ID - current payroll ID

Note: If the employee has two or more employments under the same PAYE scheme the
employer must use a different Payroll ID for each employment under that scheme.

 Employment starter information - for new employees including start dates

 Employment leaver information - date the employment ended including payment after
leaving
 There will be other information contained within the EYU including details relating to NIC
and deductions made by the employer such as NICs, tax, student loan repayments and
Statutory Payments made, for example Statutory Sick Pay and Statutory Maternity Pay. For
tax years 2013-14 onwards the EYU will also contain details of the total number of non-
individual charges and a count of the non-individual charges.
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NINO Verification Request (NVR)

From April 2012, an employer who is within RTI will have the ability for new employees
only to submit a NINO Verification Request (NVR) to allow them to either verify a NINO,
or obtain a NINO for the employee details supplied on the NVR.
This submission will include

 Surname of family name

 Forename
 Initials
 Second forename
 Date of birth
 Current gender
 Address

Further information around the NVR can be found at (This text has been withheld because
of exemptions in the Freedom of Information Act 2000).