The Importance of PAYE for New Businesses

by Josh Biggs in Finance on 27th November 2022

Employers in the UK typically use a PAYE (Pay-as-you-earn) payroll system to determine the amount of income tax and NICs their employees owe and to deduct this amount from their wages before paying them.

A small business owner must understand the PAYE tax to avoid fines and ensure that employees are paid on time. An inaccurate starter checklist significantly contributes to tax issues for those employed.

If you don’t have a P45 to give a new employer that details the amount of tax you’ve paid on your earnings ‌in the tax year, they should ask you to fill out the required details as declared in a new PAYE starter checklist.

Getting Started With PAYE

You may either manually set up a payroll system when beginning a new business or hire an accountant to handle it. Either way, you need a PAYE system set up before hiring staff.

You should follow the steps to get started with PAYE as a new business.

1.      Register with HMRC and PAYE

Firstly, you should register yourself with HMRC as an employer. You can obtain your employer’s PAYE reference number and logins for PAYE online. You must register even if you are a limited company’s only director or sole employee.

2.      Select the Right Payroll Software

Selecting the right payroll software is crucial since it can automate the entire process, saving you precious time by handling tasks like calculating NI and taxes, etc. In addition, real-time reporting of PAYE information to HMRC is a must for the software.

3.      Keep Accurate Employee Records

Ensure that you have all the right information from any new employee. This includes the start date, complete name, date of birth, national insurance number, residential address, and confirmation of any additional employment or student loans.

After gathering the data, you must then create and keep accurate records of the wages you pay your employees. This can include salaries, expenses, bonuses, deductions, etc. You will need to submit these amounts to HMRC by payday through FPS (Full Payment Submissions) and afterwards pay Income Tax, and NICs owed to HMRC.

Why PAYE is Important

All companies that employ individuals and pay them monthly are required to register for PAYE. If‌ you cannot pay PAYE, you won’t be penalised for the first time in a tax year, but further defaults will cause penalties. These will be calculated as a proportion of your remaining PAYE balance, and the percentage amount will rise if additional defaults are reported.

Incomplete payments will incur a default fee, and an additional 5% penalty will be assessed after six and twelve months if the account hasn’t been brought current.

HMRC can issue you a PLN (Personal Liability Notice) if they suspect you have purposefully neglected your tax obligations or have engaged in other fraudulent behaviour. HMRC will investigate, and directors or shareholders may be held personally accountable for the unpaid balance.

Common PAYE Mistakes

There are a few common PAYE problems that can generate concerns with HMRC. Avoiding these typical errors will clear up questions about your business administration.

Employee Misclassification

Employee misclassification, which refers to situations in which contractors or employees are incorrectly given the status of workers, is a frequent error made by different businesses. This is significant since independent contractors and freelancers cannot access employment benefits like pensions and holiday pay.

With this in mind, avoiding misclassifying your personnel is critical, especially when adhering to IR35 requirements.

Incorrect Tax Codes

Another typical mistake is specifying the incorrect tax code, which could cause employees’ pay to have too little or too much income tax withheld from it.

Employer tax compliance should be a key priority for all firms, and it’s crucial to make sure that HMRC collects the amount of tax and that employees are paid correctly.

You may avoid applying the incorrect tax code by regularly updating and reviewing your records and utilising a checklist to keep track of things.

Over-reliance on software

Thanks to substantial technological advancements, there are more chances than ever to invest in payroll software, enabling you to manage and streamline your payroll procedures.

Although payroll software might be a lifesaver, keep checking that information is entered accurately and that things are proper. Also, keep in mind that software, too, occasionally encounters problems.

Late FPS Submission

A penalty or, at the very least, a warning is normally imposed for submitting an FPS report late. However, an exception may be made if your employee cannot provide you with a P45 form or payday is on a non-banking day.


Understanding and correctly establishing a PAYE system is crucial for new businesses. This guarantees that HMRC receives payments on time and that the precise amount of tax is withheld from your employees’ paychecks.

Effective PAYE payroll management will standardise your financial administration and keep your company HMRC compliant. 

Categories: Finance