PAYE: How It Started and Why It Matters

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PAYE, how it started, why it matters, and what you need to know is a topic of this week's episode of I Hate Numbers. Today I'm going to be diving into one of the most important but often overlooked parts of running a business in the United Kingdom, PAYE. Now, whether you are employing staff or getting paid through PAYE yourself, understanding how it works is pretty essential.

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But where did it come from? Why was it introduced way back in 1944? And why is it still going strong today? And in this episode, I'm going to break down the history of PAYE and why it was a game changer: why PAYE still matters for businesses and employees in 2025, the responsibilities employers have under the system and the risks of getting it wrong,

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what employees need to do to check to avoid overpaying or underpaying tax and why PAYE is a little bit more than just tax, how it affects your cash flow, payroll and team management.

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Now, let's start off by demystifying PAYE together. Now, PAYE - pay as you earn - is the official translation or pain as you earn if I've heard some people say. It sounds a bit dry, doesn't it? Sounds a bit, you know, not a topic of conversation on the I Hate numbers podcast, but stick with me. This system has a fascinating history over 80 years old and it's still important today.

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And understanding it can save you from some serious headaches. So whether you employ staff or whether your pay through PAYE yourself, grab a cup or your drink of choice and let's unravel it together. Now, what is PAYE? Well, let's start with the basics. Now, PAYE, as I said earlier, stands for pay as you earn. It's the system used in the United Kingdom to collect income tax and national insurance and other things such as student loan repayments directly from people's wages.

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Now, if you're an employee, PAYE essentially means you don't have to worry about completing tax returns in general for your wages. In theory, it's all sorted out before your pay even deposits itself in your bank account. Now, if you're an employer, and employers, by the way, crosses the spectrum, it can be arts organisations, charities, not-for-profits, private businesses, big and small.

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If you're in the net, it doesn't matter what type of business you are. Pretty much it's universal rules across the board, and PAYE is one of your employer's key responsibilities. So how did it all start? Well, let's take a bit of a trip down memory lane, a bit of history diving into. Now we've got to wind the clock back here.

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Now imagine the situation, it's 1944. There's still a world war raging, and the UK government is spending huge amounts of money on the war effort. Planes, tanks, supplies, all of it needs money. All of it needs funding. Now, up until then, tax collection was a bit on the messy side. People in employment are paid once a year, just think of that often in one big lump sum.

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And guess what? Lots of people didn't actually pay on time, if at all. So the government needed a better way to make sure taxes were collected reliably and on a regular basis. Cash flow was important, and that's when the idea of PAYE was developed, bought, and introduced. Now, instead of waiting for people to cough up at the end of the year, tax national insurance will be taken straight out of people's wages every time they got paid.

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It was simple. It was effective, and it sold an incredibly massive problem. But here's the thing, it worked so well that 80 years later plus, we're still using it today. It's a very efficient system, certainly for the government of an army of unpaid tax collectors. Now, why is PAYE still relevant today? Why has it been with us for such a long time?

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Well, firstly, it works. For employees, PAYE takes away the stress of working out the tax bill each year. You as an employee know what you owe. It's coming out of your wages automatically. You may not like that squeeze on your wages, but nevertheless, that is taken care of you. As far as the government is concerned, it guarantees a steady flow of money coming into fund

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things like schools, hospitals, roads, public services. Now for employers, PAYE is just more than a helpful system. It's a legal obligation. You can't just say, I'm not going to operate it. If you meet the criteria, then you have to operate it effectively. If you don't, there are going to be fines and penalties hovering above your head.

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Now, if you've got staff, not freelancers, even if it's just an individual person and they earn above certain thresholds, you've got to run PAYE properly. So what are the key responsibilities for an employer under PAYE? Well, let's break it down a bit. Now, as an employer, here's what PAYE means for you in essence. Firstly, you have to register as an employer with HMRC to shorthand for her Majesty's revenue and customs.

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Secondly, you as the employer, and remember, this crosses the spectrum of business types from arts organisations, charities, not-for-profits, private businesses, you calculate how much tax, how much national insurance. Also, things like student loan deductions to deduct from each person's wages. Those deductions

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that are made are then paid over to HMRC, typically monthly, and it can be quarterly. You provide employees with their payslips showing exactly what you've taken off and what it's for. And at the end of each tax year, documents such as P60s are given out so employees can see the total for the year. They may need those documents for other purposes, but it's your obligation, your responsibility as an employer to make sure those forms are distributed.

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It sounds a lot. Well, it is anybody who thinks it's a light touch. But even with good payroll software or a payroll provider, cough, cough, it's all perfectly manageable. Now, the key thing is to remember it is your responsibility as an employer to get it right. If you get it wrong, well, let's have a guess what's going to happen.

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HMRC will come knocking. Late payments, incorrect deductions, missing filings will typically lead to fines and penalties. So what about the responsibilities of an employee under PAYE? But you might think quite rightly that everything is on the employer's shoulders. Employees also though, have a role. Now,

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as a starter for 10, it's up to employees to make sure their personal details are correct. That means you as the employee must give across the right national insurance number. You must make sure to check your tax code is correct. Sounds odd, but that's the truth. And any forms like the starter checklist,

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when you join a new employer has to be completed correctly if you don't have a P45 from a previous job. And employees also have a responsibility to check their pay slips to make sure the right deductions are being made. Make sure the right tax code is being operated. Sounds odd, but it's true. And mistakes can

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and do happen. If you think your tax code is wrong, you might be paying too much tax or not enough. HMRC will be operating that scrutiny and at some point they will want that money back. So whether you are paying somebody or being paid yourself, it pays to pay attention. Now, why does PAYE matter for small businesses, for arts organisations, for charities?

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Well, if you're running a business, PAYE can fill just another bit of admin, just a juggle to add to your tax collector who administrative wrongs. But it's actually pretty important when you get PAYE, correct. It helps you obviously stay on the right side of HMRC, who wants to be on the wrong side, keeps your team happy.

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Nobody wants to be paid late or incorrectly, and in my experience of 30 years plus, making sure that people are paid on time correctly, in the right manner is a really important consideration. If you are looking to manage cash flow, if you're looking to manage your finances a tool like Budgetwhizz, see the link in the notes, helping to manage those numbers becomes much easier.

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Now the key thing is to plan for the full cost of employing somebody. PAYE deductions are just part of the picture. You also need to budget for things like Employers’ National Insurance, pension contributions, holiday pay, and sick pay. It's part of the package of being an employer. Now, please do check the show notes out folks when we have an employment calculator for 24 25 tax year, and also we're running a webinar on how to handle the increase in Employer's National Insurance in April 25.

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I digress. Now, let's recap. PAYE might seem just like another lot of red tape on top of a lot of red tape already, but it's actually been helping small businesses and employees and employers stay on track since 1944. It makes sure tax is collected fairly and efficiently. It helps employees avoid big tax bills, and it keeps businesses running smoothly if you manage it correctly.

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Now, whether you are just thinking about hiring your first member of staff or you've been running payroll for years, it always is worth giving your processes a regular check-up. If you're not sure where to start, you guessed it - I'm here to help. Now, if you found this episode useful, I’d love it if you could subscribe. Hey, even leave a review, share it with other business owners who might need to brush up on their PAYE knowledge.

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Don't forget to check out Budgetwhizz. Check out our online calculators and register for your free webinar running on the 19th of March, 2025. Thanks for joining me. I'm Mahmood and until next time, plan it, do it, profit.