In this guide, we’ll walk you through everything you need to know about PAYE and how it affects your payroll, with the most up-to-date information from HMRC for 2025.
If you’re an employer or business owner, it’s essential to understand how PAYE works, especially with the latest updates for 2025.
What is PAYE?
Pay As You Earn (PAYE) is the method by which employers deduct tax and National Insurance contributions (NICs) from employees’ pay as they earn it. Employers are responsible for calculating and remitting the correct amount of tax and NICs to HMRC (Her Majesty’s Revenue and Customs) on behalf of their employees.
This system ensures that tax is paid gradually throughout the year, rather than in a lump sum at the end of the tax year. As part of the PAYE system, employers are also required to report employee income and deductions to HMRC on a regular basis.
How PAYE Works: The Key Steps
- Employee Tax Code
Each employee is assigned a tax code, which determines how much tax should be deducted from their earnings. The tax code is based on their personal allowance (the amount of income they can earn before paying tax) and any other allowances or deductions. Common codes include 1257L (for a standard personal allowance of £12,570 in 2025), but codes can vary depending on individual circumstances. - Deductions from Salary
Employers calculate tax and National Insurance based on the employee’s pay and their tax code. PAYE deductions are made directly from an employee’s salary or wages before they receive their pay. The deductions include:
a. Income Tax: Based on earnings and the employee’s tax code.
b. National Insurance Contributions (NICs): Both the employee and the employer make contributions to the National Insurance system. - Employer Responsibilities
Employers are required to:
a. Register as an employer with HMRC.
b. Operate PAYE on all employees earning above the lower earnings limit.
c. Calculate the correct amount of Income Tax and NICs due.
d. Pay the tax and NICs to HMRC on a regular basis (usually monthly or quarterly).
e. Provide employees with a payslip showing the deductions made from their pay.
f. Report PAYE information to HMRC in real-time through the Real Time Information (RTI) system. - Real Time Information (RTI)
Since 2013, employers have been required to report their payroll information to HMRC in real-time using the RTI system. This means that instead of submitting annual returns, employers must report employee payments and deductions every time they run payroll. This has streamlined the payroll process and ensured that the tax and NICs are paid promptly.
Key Changes to PAYE in 2025
For 2025, there are several updates and changes to PAYE regulations that employers need to be aware of. These changes reflect the ongoing efforts by the government to streamline the payroll process, enhance tax compliance, and improve support for employees.
1. National Insurance Contributions (NICs) Changes
For the 2025/26 tax year, the National Insurance rates have been updated, and these changes impact both employees and employers:
- Class 1 NICs for employees will continue to be calculated based on earnings above the Primary Threshold. For 2025, the Primary Threshold is set at £12,570 (the same as the personal allowance), meaning employees only pay NICs on earnings above this amount.
- Employer NICs:
The Class 1 Employer NICs rate is increasing. While it’s currently 13.8%, it will rise to 15% from 6th April 2025. The Secondary Threshold is decreasing. It’s currently £9,100 per year, but it will be reduced to £5,000 per year from 6th April 2025. This means employers will start paying NICs on their employees’ earnings sooner.
2. Personal Allowance and Tax Thresholds
The personal allowance (the amount of income an individual can earn before paying tax) will remain at £12,570 for the 2025/26 tax year. However, the Income Tax bands may adjust slightly for inflation.
Key changes in tax bands include:
- Basic Rate (20%): £12,571 to £50,270
- Higher Rate (40%): £50,271 to £150,000
- Additional Rate (45%): Over £150,000
Employers should ensure their employees’ tax codes are updated accordingly to reflect any adjustments.
3. PAYE Modernisation
HMRC continues to modernise the payroll process, and digitisation is a big part of this. In 2025, HMRC is expected to roll out further improvements to its online PAYE system to make it easier for employers to manage their payroll, make real-time updates, and integrate with digital accounting systems.
As part of these updates, employers will be encouraged to submit their payroll information using digital payroll solutions, and there may be additional tools to help small businesses comply with PAYE and tax laws more efficiently.
Employer Checklist for PAYE in 2025
To ensure you’re fully compliant with PAYE regulations in 2025, here’s a simple checklist for employers:
- Register as an Employer (if you haven’t already).
- Obtain the Correct Tax Codes for all employees.
- Calculate PAYE Deductions: Ensure that Income Tax and National Insurance are calculated correctly for each employee.
- Report Payroll Information to HMRC in real-time using RTI.
- Pay HMRC: Submit your tax and NIC payments to HMRC on time (monthly or quarterly).
- Provide Payslips: Ensure employees receive accurate payslips showing deductions.
- Review Tax Bands and Thresholds: Stay up-to-date with any changes to tax bands, NIC rates, and thresholds.
- Use Digital Payroll Solutions: Consider adopting or updating digital payroll software to streamline PAYE compliance.
- Stay Informed of Policy Changes: Keep track of any changes to PAYE regulations or tax laws that may impact your payroll operations.
Conclusion
The PAYE system plays a crucial role in the payroll system, ensuring that employees pay their taxes and National Insurance contributions accurately and on time. As an employer, staying compliant with PAYE regulations is essential to avoid fines and penalties.
With the updates for 2025, including changes to National Insurance thresholds and tax bands, it’s more important than ever to stay on top of your payroll responsibilities.
By using the right tools and keeping your payroll processes in check, you can ensure your business complies with HMRC regulations and continues to operate smoothly.
If you need help navigating PAYE or need assistance with payroll processing in 2025, don’t hesitate to reach out.
