This informal CPD article, ‘PAYE: an essential role in the UK payroll system’ was provided by Kintec, who build cloud-based solutions that simplify the complex and give payroll professionals the confidence to move fast, stay compliant, and grow with purpose.
PAYE plays an essential role in the UK payroll system, ensuring tax and national insurance are collected correctly from employee wages. Whether you receive a salary yourself or employ others, knowing how PAYE works helps avoid confusion and keeps everything in line with HMRCs legislations.
Understanding PAYE
PAYE, which stands for Pay As You Earn, is the method used by HMRC to collect income tax and national insurance contributions directly through payroll. Rather than employees paying a large amount of tax at the end of the financial year, deductions are taken automatically before wages are paid. During the last financial year alone (2024-2025) HMRC collected “£858.6 billion in tax revenue, which is a 3.6% increase” (Gov.co.uk, 2025) compared to the year prior.
This system helps employers stay compliant while making tax payments more manageable for employees.
What PAYE Includes
PAYE is responsible for more than just standard tax deductions (Gov.uk, 2026). It can also handle several other payments through the same payroll process, such as:
- Income tax
- National insurance contributions
- Student loan repayments
- Pension contributions
- Certain company benefits and taxable workplace perks
Because these are processed automatically through payroll, it reduces the chance of mistakes and missed payments.
How PAYE Is Worked Out
Income tax calculations follow HMRC guidelines and are based on each employee’s individual tax code (Gov.uk, 2026). A tax code tells the employer how much of someone’s earnings can be received before tax starts to apply.
Using this and other information, payroll systems calculate the correct amount of tax and national insurance to deduct from every payslip. If an employee’s personal circumstances change, such as starting a second job or receiving workplace benefits, HMRC may adjust the individual's tax code to keep deductions accurate.
PAYE Reference Number Explained
Every employer registered for PAYE receives a unique PAYE reference number from HMRC. This usually contains a three-digit HMRC office number followed by a separate reference linked specifically to the business. (OneAdvanced, 2024)
This number is important because it is used for:
- Real Time Information (RTI) submissions
- Tax return records
- Student finance applications
- Tax credit claims
- Matching payroll payments to the correct employer account
It can normally be found on documents such as P45s, P60s, and employee payslips.
Employer Duties Under PAYE
Running PAYE means employers must meet several legal responsibilities, including:
- Registering for PAYE with HMRC
- Making accurate deductions for tax and national insurance
- Sending payroll information through RTI on or before payday
- Paying all employee deductions and employer national insurance contributions to HMRC on time
Failure to meet these obligations can result in penalties, so maintaining accurate payroll records is essential. (Gov.uk, 2026)
Payroll Software Considerations
Using dedicated payroll software can help businesses reduce admin, improve accuracy, and stay compliant with HMRC requirements.
The main benefits include:
- Fewer calculation errors
- Faster payroll processing
- Automatic RTI submissions
- Better compliance with HMRC regulations
- Simpler pension and auto-enrolment management
For many growing businesses, reliable payroll software can be beneficial rather than just convenient.
Keeping Payroll Under Control
PAYE is a major part of managing business finances effectively (RWB, 2025). When payroll is handled properly, employees are paid correctly, deductions are accurate, and compliance issues are far less likely.
Having the right processes in place gives employers stronger control over payroll, saves valuable time, and provides confidence that everything is being managed correctly throughout the year.
We hope this article was helpful. For more information from Kintec, please visit their CPD Member Directory page. Alternatively, you can go to the CPD Industry Hubs for more articles, courses and events relevant to your Continuing Professional Development requirements.
References:
- Earl, S. (2025) Understanding paye: A beginner’s guide to UK payroll, RWB. Available at: https://rwbca.co.uk/blogs/understanding-paye-a-beginners-guide-to-uk-payroll#:~:text=PAYE%2C%20which%20stands%20for%20Pay,as%20an%20Employer%20with%20HMRC (Accessed: 21 April 2026).
- HMRC tax receipts and National Insurance Contributions for the UK (annual bulletin) (no date) GOV.UK. Available at: https://www.gov.uk/government/statistics/hmrc-tax-and-nics-receipts-for-the-uk/hmrc-tax-receipts-and-national-insurance-contributions-for-the-uk-new-annual-bulletin (Accessed: 21 April 2026).
- Paye Manual (no date) PAYE11001 - Coding: codes: how they are used and calculated: introduction - HMRC internal manual - GOV.UK. Available at: https://www.gov.uk/hmrc-internal-manuals/paye-manual/paye11001#:~:text=PAYE11000,another%20part%20of%20the%20UK (Accessed: 21 April 2026).
- Service, G.D. (2015a) Paye and payroll for employers, GOV.UK. Available at: https://www.gov.uk/paye-for-employers/keeping-records (Accessed: 21 April 2026).
- Service, G.D. (2015b) Paye and payroll for employers, GOV.UK. Available at: https://www.gov.uk/paye-for-employers (Accessed: 21 April 2026).
- What is a payroll number? (no date) OneAdvanced. Available at: https://www.oneadvanced.com/resources/what-is-a-payroll-number/ (Accessed: 21 April 2026).
