What is Pay As You Earn (PAYE) tax?

Pay As You Earn (PAYE) is a tax system for collecting income tax and social contributions directly from employees’ salaries or wages.

PAYE is common in jurisdictions including the UK, Ireland, South Africa, Australia, and others. While names and specifics vary, the core idea is the same: real-time, employer-facilitated tax withholding.

How PAYE works

PAYE ensures both employers and employees stay compliant with local regulations. Typically, all employers with employees earning a certain amount per week must register for PAYE. This requirement may also be triggered if an employee receives company benefits or expenses or is receiving pension contributions.

Employers calculate, deduct, and submit income tax and insurance contributions based on employees’ earnings and tax codes. Employees benefit from incremental tax payments, avoiding large tax bills at the end of the tax year.

What are the PAYE responsibilities for employers?

HR and payroll teams are responsible for:

• Ensuring employees are on the correct tax code
• Calculating and deducting income tax and insurance. These are always listed as separate deductions on employees’ payslips
• Keeping detailed payroll records
• Submitting reports to local and federal tax authorities on time
• Providing payslips and tax documents like P60s in the UK (end of tax year statement)
• Ensuring all employees are paid the requirement minimum wage

For example, employers failing to meet PAYE requirements may face penalties in the UK. Learn more about reducing payroll costs in the UK.

PAYE and multiple jobs

In PAYE countries, tax-free income thresholds usually apply only to the primary job. Secondary employment is often taxed at higher marginal rates.

Employers should:

• Apply the correct tax code for each role

• Ask employees to declare other sources of income

• Update records promptly to avoid over- or underpayment

Employees might need to file a year-end return to reconcile taxes paid across jobs.

PAYE, benefits in kind, and other deductions

Certain employee benefits are considered taxable income under PAYE:

• Benefits in Kind (BIKs): Company cars, private healthcare, or other non-cash compensation are taxable
• State Pension Contributions: Employers deduct insurance contributions to help fund the state pension
• Student Loan Repayments: PAYE deductions may include income-based repayments for student loans. These are usually triggered once the individual’s salary reaches an eligible income threshold specified by the loan plan they have signed up for

PAYE for freelancers, contractors, and global employees

• Freelancers and contractors: PAYE typically applies only to employees. Self-employed individuals must file tax returns and pay their own taxes. However, some contractors may be subject to PAYE under IR35 regulations. These off-payroll regulations specify whether a particular contractor is to be treated as if they are a regular employee or whether they can be left outside the PAYE reckoning due to them being genuinely self-employed
• Global hiring: Employers hiring internationally must comply with each country’s equivalent of PAYE. This can be an onerous requirement without accounting assistance. Deel’s global payroll solution helps businesses manage compliance worldwide, for instance

Common PAYE challenges and compliance issues

Employers may face several challenges when managing PAYE:

• Keeping up with tax rate changes
• Applying the correct tax codes
• Managing payroll for employees with variable earnings or cross-border employment
• Submitting accurate reports to local tax authorities

Mistakes can lead to penalties and financial hardship for employees due to incorrect tax deductions. Learn more about UK tax basics for employers.

How Deel simplifies PAYE compliance

PAYE compliance can be a complex process, with tax rates and employee eligibility changing from year to year or even month to month. Deel’s payroll solution automates PAYE compliance with features like:

• Real-time gross-to-net calculations
• Automated tax compliance
• Payroll processing in multiple jurisdictions

To streamline payroll compliance, request a Deel demo.