Check If You Need To Pay Someone Through PAYE: Complete UK Employer Guide

If you are an employer in the UK, understanding whether you need to make a PAYE payment for someone you hire is essential. Paying workers through the correct payroll system ensures you meet your responsibilities under HMRC PAYE Rules and helps you avoid potential tax and compliance issues.

Employers do not need to use PAYE for every person they pay. The requirement depends on the worker’s employment status, earnings, and working arrangements. Employees are generally paid through PAYE, while genuinely self-employed individuals usually manage their own tax responsibilities.

This guide explains when you need to pay employees through PAYE, how PAYE works for temporary and agency workers, what information you need before making payroll payments, and how to stay compliant with HMRC requirements.

What Is PAYE and Why Do Employers Need It?

PAYE (Pay As You Earn) is HMRC’s system for collecting Income Tax and National Insurance contributions from employees’ wages. Instead of employees paying their tax liability directly at the end of the year, employers deduct the required amounts from salaries and send these deductions to HMRC through payroll submissions.

When you employ someone, you are responsible for operating payroll correctly, calculating deductions accurately, reporting payments to HMRC, and keeping appropriate records. Making the correct PAYE payment on time helps ensure both employers and employees meet their tax obligations.

When Do You Need To Pay Someone Through PAYE?

In most cases, you must operate PAYE if the person you pay is classed as an employee and their earnings meet certain HMRC conditions. Employers should not decide based only on job titles or contracts. Instead, you must consider the individual’s actual working relationship with your business.

Generally, you may need to run payroll and make a PAYE payment if the worker:

• Works for your business as an employee.
• Receives regular wages or salary payments.
• Has Income Tax or National Insurance deductions that need to be processed.
• Receives benefits or expenses that must be reported through payroll.

Under current HMRC PAYE Rules, employers should assess each worker’s employment status carefully before deciding whether PAYE applies.

Employee vs Self-Employed: Who Should Be Paid Through PAYE?

One of the most common PAYE mistakes employers make is treating workers as self-employed when they should legally be employees. The way someone is paid does not determine their employment status; HMRC considers the overall working arrangement.

Signs Someone Is an Employee

A person is more likely to be an employee if they:

• Work under your direction and control.
• Have set working hours or regular duties.
• Provide services personally rather than sending someone else.
• Receive regular payments from your business.
• Do not carry significant financial risks connected with the work.

If these factors apply, you will usually need to pay employees through PAYE and manage their tax and National Insurance deductions through payroll.

Signs Someone Is Self-Employed

A worker may be considered self-employed if they:

• Run their own business.
• Control how and when they complete their work.
• Can provide a substitute to complete the work.
• Take responsibility for financial success or failure.
• Provide their own equipment and services to multiple clients.

Genuinely self-employed individuals are usually responsible for managing their own tax affairs and do not normally receive payments through your PAYE system.

How HMRC Determines Employment Status

HMRC looks at several factors when deciding whether someone should be treated as an employee or self-employed worker. There is no single test that determines status; instead, HMRC reviews the complete working relationship.

Important factors include:

• The level of control the business has over the worker.
• Whether the worker must personally complete the work.
• Whether there is an ongoing obligation to provide and accept work.
• Who provides equipment and covers expenses.
• The financial risk taken by the worker.

Getting employment status wrong can create unexpected tax liabilities, penalties, and additional reporting requirements. Employers should review their arrangements regularly to ensure they continue following the correct HMRC PAYE Rules.

Do You Need To Use PAYE For Temporary Workers?

Temporary workers can sometimes create confusion for employers because their working arrangements may differ from permanent employees. However, temporary status alone does not decide whether PAYE applies. The key factor is whether the individual is classed as an employee under HMRC rules.

If you directly hire and pay a temporary worker who is treated as an employee, you will normally need to include them in your payroll system and make the correct PAYE payment to HMRC.

Employers should assess temporary workers in the same way as permanent staff by reviewing factors such as control, responsibilities, payment arrangements, and employment status.

PAYE Rules For Agency Workers

Many businesses use recruitment agencies to hire temporary staff, but the PAYE responsibilities can vary depending on who pays the worker and how the arrangement is structured.

In most situations, if a worker is employed and paid by an agency, the agency is responsible for operating PAYE and deducting the correct tax and National Insurance contributions before paying the worker.

However, businesses should understand their responsibilities when using agency workers. If you pay the worker directly rather than through an agency, you may need to pay employees through PAYE yourself.

When Does PAYE Apply To Agency Workers?

You may need to consider PAYE responsibilities when:

• The worker is supplied by an agency but your business directly pays their wages.
• The agency does not have a UK trading presence or representative.
• The working arrangement means the individual is legally treated as your employee.
• The worker does not meet the requirements to be treated as genuinely self-employed.

The rules surrounding paye through agency arrangements can be complex, especially when multiple parties are involved. Reviewing contracts and payment responsibilities before engaging workers can help prevent payroll errors.

How To Set Up PAYE When Hiring A New Employee

When you hire a new employee, you must collect the correct information before processing their first PAYE payment. This ensures your payroll software calculates the correct tax deductions and National Insurance contributions.

Employers should complete the following steps when adding a new employee to payroll:

1. Check The Employee’s P45

A new employee may provide a P45 from their previous employer. This document contains important payroll information, including their previous earnings and tax deductions.

Using the information from the P45 helps you apply the correct tax code and prevents employees from paying the wrong amount of tax.

2. Use HMRC’s Starter Checklist If There Is No P45

If your new employee does not have a recent P45, you should ask them to complete HMRC’s starter checklist. The information provided helps you decide which starter declaration and tax code should be used in your payroll system.

Using incorrect employee details can result in incorrect deductions, which may require adjustments later.

3. Register As An Employer With HMRC

Before making payroll payments, employers generally need to register with HMRC as an employer. Once registered, HMRC provides the details required to operate payroll correctly.

Employers will receive important payroll information, including their paye reference number. This reference identifies your employer PAYE account when communicating with HMRC and submitting payments.

What Is A PAYE Reference Number?

A paye reference number is a unique identifier assigned by HMRC to employers who operate PAYE. It is used when submitting payroll information and making payments to HMRC.

Your PAYE reference number is usually made up of two parts:

• A three-digit HMRC office number.
• A reference number that identifies your employer PAYE account.

You can usually find your PAYE reference number on:

• Letters received from HMRC after registering as an employer.
• PAYE correspondence from HMRC.
• Your payroll records.
• Your HMRC online employer account.

Keeping your PAYE reference number secure and accessible helps ensure payments and submissions are correctly linked to your business account.

How Employers Make PAYE Payments To HMRC

After processing payroll, employers must report employee payments and deductions to HMRC through a Full Payment Submission (FPS). The amount deducted from employees’ wages, including Income Tax and National Insurance, must then be paid to HMRC by the required deadline.

A correct PAYE payment process involves:

• Calculating employee wages accurately.
• Deducting Income Tax and National Insurance.
• Submitting payroll information to HMRC.
• Paying HMRC the amount due before the deadline.
• Keeping payroll records for future reference.

Late or incorrect PAYE submissions can lead to interest charges, penalties, and additional compliance checks from HMRC.

Common PAYE Mistakes Employers Should Avoid

Managing payroll correctly is essential for every UK employer. Even small mistakes with PAYE reporting or deductions can create problems for both businesses and employees. Understanding common errors can help you maintain accurate payroll records and follow HMRC PAYE Rules effectively.

Using The Wrong Employment Status

One of the most common PAYE mistakes is incorrectly classifying an employee as self-employed. Some businesses believe they can avoid payroll responsibilities by paying workers as contractors, but HMRC focuses on the actual working relationship rather than the name given in a contract.

If someone should legally be treated as an employee, failing to pay employees through PAYE may result in unpaid tax, National Insurance liabilities, interest charges, and potential penalties.

Applying The Wrong Tax Code

When a new employee joins your business, using the incorrect tax code can cause them to pay too much or too little tax. Employers should collect the correct information from the employee’s P45 or starter checklist before processing their first payroll payment.

Regularly checking payroll records helps identify mistakes early and reduces the risk of incorrect deductions.

Missing PAYE Payment Deadlines

Employers must pay the amounts deducted from employee wages to HMRC by the required deadlines. Missing payment dates can result in penalties and interest charges.

Businesses should create a clear payroll schedule to ensure every PAYE payment is calculated, submitted, and paid on time.

Failing To Keep Payroll Records

Employers must keep accurate payroll information, including employee details, payment records, tax calculations, and HMRC submissions. Good record keeping helps businesses respond quickly if HMRC requests information during a compliance check.

PAYE Penalties And Risks For Employers

Employers have legal responsibilities when operating PAYE. If payroll duties are not completed correctly, HMRC may take action to recover unpaid amounts or apply penalties.

Potential PAYE risks include:

• Late payment penalties for amounts owed to HMRC.
• Incorrect tax and National Insurance calculations.
• Additional costs due to unpaid employee deductions.
• HMRC compliance checks or investigations.
• Extra administrative work to correct payroll records.

The severity of penalties depends on factors such as the amount involved, how late the payment is, whether the mistake was deliberate, and whether the employer cooperates with HMRC.

How To Stay Compliant With HMRC PAYE Rules

Following a structured payroll process can help employers avoid unnecessary problems and maintain compliance. Businesses should review their payroll responsibilities regularly, especially when hiring new workers or changing employment arrangements.

Maintain Accurate Employee Information

Always keep updated records for employees, including:

• Full name and address details.
• National Insurance number.
• Tax code information.
• Salary or wage details.
• Employment start and leaving dates.

Accurate information ensures payroll software calculates deductions correctly and supports accurate PAYE payment submissions.

Use Reliable Payroll Software

Using suitable payroll software reduces manual errors by automatically calculating tax deductions, National Insurance contributions, and reporting requirements.

Payroll software can also help employers submit information to HMRC through Real Time Information (RTI), making it easier to manage ongoing PAYE responsibilities.

Review Worker Arrangements Regularly

Employment arrangements can change over time. A person who was previously treated as self-employed may become an employee if their working relationship changes.

Regular reviews help businesses identify whether they still need to pay employees through PAYE or update their payroll processes.

When Should You Seek Professional PAYE Support?

PAYE responsibilities can become complicated as businesses grow, especially when they employ multiple workers, use contractors, or work with agencies. Professional payroll support can help ensure your business follows current regulations and avoids costly mistakes.

An experienced accounting professional can assist with:

• Setting up PAYE payroll systems.
• Checking employee employment status.
• Managing payroll submissions.
• Understanding complex paye through agency arrangements.
• Resolving HMRC payroll queries.

Getting payroll right from the beginning allows employers to focus on running their business while maintaining confidence that their tax responsibilities are being handled correctly.

Case Study: Helping a Growing Business Understand PAYE Responsibilities and Payroll Compliance

Michael visited our Wimbledon office after becoming concerned about whether all of his workers were being paid through the correct payroll system. As his business expanded, he started hiring a combination of permanent employees, temporary workers, and independent contractors, making it more difficult to understand when a PAYE payment was required.

During the discussion, Michael explained that he understood employees needed to be processed through payroll but was unsure about certain contractors and temporary workers. He wanted to make sure his business was following HMRC PAYE Rules correctly and avoiding potential issues caused by incorrect employment status decisions.

Cigma Accounting reviewed Michael’s worker arrangements and explained how HMRC considers the actual working relationship rather than simply the wording used in contracts. We discussed the key factors that determine whether someone should be paid through PAYE, including control over work, regular payments, personal service requirements, and financial responsibility.

For example, businesses may need to review several payroll responsibilities when hiring different types of workers, including:

• Checking whether employees and contractors are correctly classified
• Setting up PAYE payroll processes for eligible employees
• Ensuring accurate Income Tax and National Insurance deductions
• Managing temporary and agency worker payment arrangements
• Keeping complete payroll records for future HMRC checks

We also explained how maintaining accurate employee information, using reliable payroll systems, and submitting payroll details on time can help businesses remain compliant and reduce the risk of penalties.

Michael was left with a clearer understanding of when he needed to pay employees through PAYE, how HMRC determines employment status, and the steps required to manage payroll responsibilities confidently as his business continues to grow.