PAYE is the system by which employers deduct tax from their employees and account for those deductions to HMRC. It was first introduced into the UK in 1944.
PAYE is applied to all forms of remunerations and emoluments including payments in kind, but is not applied to dividends or other payments made to an employee or director but not linked to the duties performed by that employee or director such as interest or rent, (e.g. for premises used by an employer but owned by a director).
PAYE is accounted for by reference to a tax month, which runs from the 6th of one month to the 5th of the next month. Employers are required to pay over deductions to HMRC 14 days after the end of each tax month.
Some owner managed companies such as computer contractors choose to pay a single salary in each year, often between 6th March and 5th April. In choosing this option, they simplify administration and only need to pay over deductions once each year.
Employers must also file an annual return made up to 5 April each year recording employees and deductions for the year. This form needs to be filed on line by no later than the following 19th May. Employees are provided with an annual summary of their gross earnings and deductions at the same time. This form is known as a P60.
National Insurance is administered along with PAYE so in most cases deductions represent both PAYE and National Insurance.
The system is policed by a range of penalties for delays in filing returns and making payments.