If you’ve recently hired your first employee you’ve probably come across the term payroll tax. In the UK, this is often used as a catch-all phrase to describe the taxes and deductions that employers are responsible for when paying staff.

The official term used by HMRC is PAYE, short for Pay As You Earn, and it’s the system used to collect Income Tax and National Insurance from employees’ wages. As an employer, you’re responsible for handling this on behalf of your team.

PAYE is something that you will need to understand clearly, as you’ll likely have to manage it throughout your entire time as an employer, or at least until you hire an HR team!

It isn't actually all that complicated but it’s well worth taking time to get familiar with how the system works.  Today we’ll teach you everything you need to know about payroll tax in the UK, so you can stay compliant for years to come.

What is payroll tax in the UK?

While “payroll tax” is a common phrase, especially in the US, it’s not an official HMRC term in the UK. Here, it’s generally used to describe the various taxes and deductions that come out of an employee’s pay.

In the UK, the system that handles these deductions is called PAYE (Pay As You Earn). This is the method HMRC uses to collect Income Tax and National Insurance contributions from employees through their wages.

As an employer, your job is to calculate these deductions for each employee every time you pay them, send the correct amounts to HMRC, and report the details via payroll software or a payroll provider.

So, when someone refers to “payroll tax” in the UK, they’re usually talking about your PAYE responsibilities - deducting tax and National Insurance, and paying it over to HMRC on behalf of your team.

What is PAYE and how does it work for employers?

PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance directly from employees' wages. If you employ staff and pay them over a certain threshold, you’re legally required to operate PAYE as part of your payroll.

It works as follows:

1. You calculate deductions each time you run payroll. This includes:

• Income Tax based on each employee’s tax code
  
• Employee National Insurance contributions
  
• Any other deductions, like student loan repayments or workplace pension contributions
  

2. You also pay Employer National Insurance, which is an additional cost to the business—not deducted from the employee’s pay

3. You then report this information to HMRC in real time, usually using payroll software

4. Finally, you pay the total amount due (employee deductions + employer contributions) to HMRC by the 22nd of the following month (or the 19th if paying by post)

PAYE is essentially your way of helping HMRC collect what’s owed by your employees, and it comes with a few extra costs and responsibilities for you as an employer.

{{ltd-guide}}

Who needs to register for PAYE?

Not every employer needs to register for PAYE straight away, but most do once they start paying staff regularly.

You’ll need to register for PAYE with HMRC if any of your employees:

• Earn £123 a week or more (the Lower Earnings Limit, as of the 2025/26 tax year)
  
• Receive benefits in kind (like a company car or private medical insurance)
  
• Have another job or receive a pension
  
• Are repaying a student loan

It’s also worth noting that directors of limited companies often need to be put on the payroll, especially if they’re drawing a salary above the threshold. 

You should register with HMRC before the first payday, and it can take up to five working days to receive your PAYE reference numbers, so don’t leave it until the last minute.

Payroll tax responsibilities for employers

Once you're registered for PAYE, you take on a few key responsibilities that repeat each time you pay your employees. These aren’t just box-ticking exercises—they’re legal obligations, and getting them right is essential for staying compliant.

Here’s what you’ll need to do:

- Run payroll each time you pay staff – This includes calculating gross pay, deductions (like tax and NI), and net pay.

- Deduct the right amounts – You’re responsible for making accurate deductions for:

• Income Tax
  
• Employee National Insurance
  
• Student loan repayments (if applicable)
  
• Workplace pension contributions (if enrolled)
  

- Add on your employer costs – You’ll also need to pay:

• Employer National Insurance contributions
  
• Employer pension contributions (if applicable)
  

- Send a Full Payment Submission (FPS) to HMRC – This must be submitted on or before each payday, telling HMRC what you’re paying and deducting.

- Pay HMRC on time – Usually by the 22nd of the following month (or 19th if paying by post).

- Provide payslips to all employees every payday, showing all deductions.

- Keep records – You’re required to keep payroll records for at least 3 years.

This all becomes part of a smooth routine once you get your system set up.

Using outsourcing solutions to stay on top of PAYE and Payroll Tax

Handling payroll in-house is possible, but it does come with admin, deadlines, and a fair bit of number crunching. That’s why many employers choose to  outsource to an accountant or payroll provider.

This options can help you:

• Accurately calculate tax and National Insurance.
  
  
• Submit Real Time Information (RTI) to HMRC automatically.
  
  
• Generate payslips and reports.
  
  
• Avoid late filing or payment penalties.
  
  
• Free up your time to focus on running the business.
  
  

Outsourcing offers extra peace of mind, especially if you’re not entirely clued up about tax rules or don’t want to risk making errors.

So, whilst the term “payroll tax” might sound like another arduous tax task, it’s more about managing your responsibilities correctly under the PAYE system. With the right system in place, and expert support, you can stay compliant, pay your team on time, and avoid any unwelcome surprises from HMRC.

Need help getting started or simplifying your payroll process? It might be time to talk to a professional.