What's PAYE?
PAYE is the system HMRC uses to collect Income Tax and National Insurance from employment income. Here's how it works for limited company directors and their staff.
PAYE stands for Pay As You Earn. It's the system HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employment income.
When a salary is paid, the tax and NICs due are calculated and deducted before the money reaches the employee. That's the 'pay as you earn' part: the liability is settled at the point of payment, rather than through a separate tax return at the end of the year.
For limited company directors, PAYE is relevant in two situations: paying yourself a salary as a director and employing staff.
How PAYE works
When a company runs PAYE, it takes on the role of employer. Each time a salary payment is made, the company calculates:
Income Tax based on the employee's tax code and cumulative earnings;
Employee NICs, deducted from the employee's gross pay;
Employer NICs, paid by the company on top of the gross salary.
The company collects the Income Tax and employee NICs from the salary, adds its own employer NICs, and pays the full amount to HMRC. This is usually done monthly, shortly after payroll is run.
HMRC provides each employee with a tax code, which tells the payroll software how much tax-free pay they're entitled to before Income Tax kicks in. The most common code for someone with one job and no unusual adjustments is 1257L, which reflects the current personal allowance of £12,570.
Setting up PAYE as an employer
To run payroll, you need to register as an employer with HMRC before the first salary is paid. Once registered, you'll receive a PAYE reference number, which is used on all submissions and payments.
You'll also need payroll software. HMRC has a list of approved providers, including some free options for smaller employers. The software handles the calculations and sends Real Time Information (RTI) submissions to HMRC each time payroll is run.
RTI is the reporting system that keeps HMRC up to date. Each pay run triggers a submission, so HMRC knows exactly what's been paid, what's been deducted and what's owed.
You can absolutely set this up yourself, and for a single-director company it's manageable. But honestly, most of our clients hand payroll over to us. It's one of those things that's easy when everything goes smoothly, and genuinely fiddly when it doesn't.
Tax code changes, director NIC rules, RTI submissions, year-end returns… the moving parts add up. Having someone else run it means it gets done on time, correctly, and you don't have to think about it.
PAYE for limited company directors
Most limited company directors pay themselves using a mix of salary and dividends, with company pension contributions on top. PAYE sits at the centre of the salary part of that arrangement.
A director's salary is run through payroll just like any other employee's. The salary reduces the company's taxable profit, which reduces the Corporation Tax bill. That's one of the reasons a salary tends to make sense even when dividends are the primary source of income.
The level of salary most directors choose is usually set with one of two benchmarks in mind:
At the National Insurance lower earnings limit (£6,708 for 2025/26), which keeps the director in the National Insurance record without triggering any contributions to pay
At the primary threshold (£12,570 for 2025/26), which uses the full personal allowance and qualifies for National Insurance credits, though small NICs become payable at this level
The right level depends on the company's financial position, other income and personal circumstances. This should be reviewed each tax year rather than leaving it on autopilot.
PAYE when you employ staff
If you take on employees, PAYE becomes a legal obligation. You're responsible for:
registering as an employer with HMRC;
running payroll and making RTI submissions each pay period;
deducting Income Tax and employee NICs from wages;
paying employer NICs on salaries above the secondary threshold;
issuing payslips to all employees;
completing year-end submissions, including P60s for all employees and P11Ds for any benefits in kind.
You also have duties under pension auto-enrolment. Eligible employees must be assessed and enrolled into a workplace pension, with minimum contributions made by both employer and employee. The Pensions Regulator oversees these requirements and sets out the rules clearly on its website.
Year-end PAYE responsibilities
At the end of each tax year (5 April), there are a few things to wrap up:
P60: issued to every employee who was on the payroll at 5 April, showing their total pay and deductions for the year
P11D: filed with HMRC for any employee or director who received benefits in kind, such as a company car or private medical insurance
Final payroll submission: confirms to HMRC that the year is complete
These deadlines are fixed, so it's worth building them into your calendar at the start of the year.
What PAYE means in practice
Once payroll is running smoothly, it tends to feel straightforward. The calculations are handled by the software, the submissions go to HMRC automatically and the payment is made on a fixed schedule. The admin is light once the setup is done.
For directors, PAYE is one part of a wider picture that includes dividends, pension contributions and Corporation Tax planning. Getting the salary level right, and keeping it under review, is a useful starting point for making sure the company's money is working as efficiently as it can.