Step 4: Calculate Deductions and Run Payroll
Once your PAYE scheme is set up and your employees are registered in your payroll system, you can begin processing payroll. This involves calculating tax deductions, generating payslips, and submitting reports to HMRC.
1. Calculate Payroll Deductions
Your payroll software will automatically calculate deductions from an employee’s gross pay.
These include:
- Income Tax – Based on the employee’s tax code and earnings. Use HMRC’s tax calculator here.
- National Insurance Contributions (NICs) – Includes both:
- Employee NICs (deducted from wages).
- Employer NICs (paid separately by the business).
- Student Loan Repayments – If applicable, repayments are deducted based on the employee’s loan plan type. Check repayment thresholds here.
- Pension Contributions – If your business operates auto-enrolment, employee and employer pension contributions will also be deducted.
2. Generate Payslips
You must provide each employee with a payslip detailing their:
- Gross Pay – Total earnings before deductions.
- Deductions – A breakdown of Income Tax, NICs, pensions, and any other adjustments.
- Net Pay – The final amount paid to the employee.
Payslips can be digital or paper-based, but they must be issued on or before payday.
3. Submit RTI Reports to HMRC
Under Real-Time Information (RTI) rules, you must report payroll details to HMRC every payday. The main submission is the:
Full Payment Submission (FPS) – Sent to HMRC on or before each payday, showing:
- Employee earnings.
- Tax and NICs deducted.
- Student loan and pension contributions (if applicable).
Employer Payment Summary (EPS) – If needed, this is used to reclaim statutory payments (e.g., sick pay, maternity pay) or notify HMRC of no payments in a period.
You can file RTI reports directly through your payroll software, ensuring compliance with PAYE regulations.
For full RTI guidance, visit HMRC’s RTI reporting page.
Step 5: Pay HMRC
After deducting Income Tax, National Insurance Contributions (NICs), and other payroll liabilities, you must pay these amounts to HMRC on time to avoid penalties.
How to Pay HMRC
Once you’ve submitted your RTI Full Payment Submission (FPS), your payroll software will calculate the total PAYE tax and NICs owed for the period. You can pay HMRC using:
- Online Banking (Faster Payments, CHAPS, or Bacs) – The fastest and most secure method.
- Direct Debit – Set up an automated payment through HMRC’s Direct Debit service.
- Debit/Credit Card – Payments can be made via the HMRC payment portal.
- Cheque or Bank Transfer – Only an option for businesses that cannot pay electronically.
PAYE Payment Deadlines
To remain compliant with PAYE regulations, ensure your payments reach HMRC by:
- 22nd of each month – If paying electronically (e.g., bank transfer, Direct Debit).
- 19th of each month – If paying by cheque or other non-electronic methods.
If you pay late, HMRC may charge interest and penalties. Check the latest penalty structure here.
Keeping accurate payroll records is a legal requirement for PAYE compliance and helps in case of HMRC audits.
What Records Should You Keep?
Employers must store payroll records for at least three years and ensure they include:
- Employee details – Names, NI numbers, and tax codes.
- Payslips and payroll reports – Gross pay, deductions, and net pay.
- RTI Submissions – Copies of FPS and EPS reports sent to HMRC.
- PAYE payments to HMRC – Proof of tax and NIC payments made.
- Statutory payments – Records of sick pay, maternity pay, or redundancy payments.
Failing to maintain accurate payroll records can result in HMRC penalties of up to £3,000. For full record-keeping guidelines, visit HMRC’s payroll record-keeping page.
Tips for Managing PAYE Efficiently
Setting up a PAYE scheme is just the first step—ongoing management is key to staying compliant and avoiding penalties. Here are some expert tips to help you run payroll smoothly.
1. Stay Organised with Payroll Software
Using HMRC-recognised payroll software can streamline PAYE processes by:
- Automating calculations for Income Tax, NICs, and student loan repayments.
- Tracking important deadlines for PAYE payments and RTI submissions.
- Generating payslips and keeping digital payroll records to ensure compliance.
Popular options: Xero, QuickBooks, BrightPay.
2. Understand PAYE Deadlines to Avoid Penalties
RTI Full Payment Submission (FPS): Must be sent to HMRC on or before each payday.
PAYE Tax and NIC Payments:
- Electronic payments – Due by the 22nd of each month.
- Non-electronic payments – Due by the 19th of each month.
Late payments can result in interest charges and penalties. Learn more about PAYE late penalties here.
3. Consider Outsourcing Payroll to Save Time
If managing payroll in-house becomes overwhelming, outsourcing to a payroll provider or accountant can:
- Ensure compliance with PAYE, RTI, and auto-enrolment regulations.
- Reduce administrative workload, freeing up time for core business tasks.
- Minimise errors and avoid costly mistakes.
If you’re looking for expert payroll management, consider Accounting Wise’s payroll services to handle everything from PAYE registration to RTI submissions.
Conclusion: Setting Up a PAYE Scheme the Right Way
Setting up a PAYE scheme is a crucial step for any UK business that employs staff. By following the steps outlined in this guide—registering with HMRC, choosing payroll software, calculating deductions, and meeting PAYE deadlines—you’ll ensure compliance while managing payroll efficiently.
While running PAYE and payroll can seem complex, the right tools and processes make it easier. Staying organised, understanding key deadlines, and using HMRC-recognised payroll software can help prevent errors and avoid penalties.
At Accounting Wise, we specialise in PAYE registration, payroll management, and tax compliance. Whether you need one-off guidance or a fully managed payroll service, we’re here to help.
Need expert payroll support? Contact us today at Accounting Wise to streamline your payroll process and stay compliant with HMRC regulations.
