Under UK tax law, the employer is responsible for paying PAYE tax to HMRC. The employee is the person whose income is being taxed, but the legal duty to calculate deductions, run payroll, and get the money to HMRC sits with the employer under the Income Tax (Pay As You Earn) Regulations 2003.1GOV.UK. Compliance Handbook – Penalties for Failure to Pay on Time: PAYE and NIC Obligations That basic rule holds in most situations, but it bends around company directors, off-payroll contractors, and pension providers, and it can shift to the employee where HMRC issues a formal direction.
What the Employer Must Do
Any employer paying staff above the Lower Earnings Limit for National Insurance, £125 per week for the 2025/26 tax year, has to operate PAYE.2GOV.UK. National Insurance Rates and Categories: Contribution Rates That means working out the right income tax and National Insurance for each employee based on their individual tax code, then reporting the figures to HMRC through the Real Time Information (RTI) system on or before each payday.3GOV.UK. Reporting to HMRC: FPS A final Full Payment Submission is due on or before the last payday of the tax year, which ends on 5 April.4GOV.UK. Send Your Final Payroll Report
When someone joins, the employer sets their tax code using either the P45 from the previous job or a completed starter checklist.5GOV.UK. Tell HMRC About a New Employee: Late P45 or Starter Checklist Getting this wrong at day one can mean months of incorrect deductions that are painful to unwind later.
Both the income tax withheld from the employee and the employer’s own National Insurance contribution are the employer’s responsibility to calculate, report, and pay to HMRC through the same PAYE process. The employer contribution is a genuine additional cost on top of the employee’s salary rather than a deduction from it.
When the Employer Is Liable for Underpaid Tax
If an employer deducts too little PAYE from an employee’s pay, the employer, not the employee, is on the hook for the shortfall. Regulation 80 of the PAYE Regulations 2003 gives HMRC the power to determine the outstanding amount and recover it directly from the employer.6GOV.UK. PAYE Manual – Regulation 80 HMRC’s internal guidance is explicit: the underpayment should be recovered from the employer, not the taxpayer.7GOV.UK. PAYE Manual – PAYE90020
When the Bill Moves to the Employee
Regulation 72 of the PAYE Regulations 2003 sets out two exceptions where HMRC can direct that the employer does not have to pay the shortfall, moving the debt to the employee.8Legislation.gov.uk. The Income Tax (Pay As You Earn) Regulations 2003 – Regulation 72
- Good-faith employer error. The employer took reasonable care to comply with the regulations and the under-deduction was a genuine mistake. HMRC issues a direction notice to both parties.
- Employee knew about the failure. Where the employee received payments knowing the employer had deliberately failed to deduct the right amount of tax, HMRC can direct the liability to the employee alone, and interest runs on the unpaid amount.
The second scenario catches workers who collude with an employer to pocket higher take-home pay by sidestepping PAYE. If HMRC can show the employee knew the deductions were wrong, it will pursue the employee personally.
What the Employee Is Still Responsible For
Even though the employer handles the mechanics, the employee carries their own obligations. The most important is making sure HMRC holds accurate information to generate the right tax code. A wrong tax code means you either overpay or underpay through the year, and HMRC will eventually catch up with the difference.9GOV.UK. Tax Codes: If You’ve Paid Too Much or Too Little Tax Checking your payslip each month against your tax code notice is the simplest way to spot errors early.
You should also tell HMRC about changes that affect your tax, such as starting a second job, receiving taxable benefits, or losing eligibility for an allowance. Failing to report these can produce a growing underpayment that surfaces as an unexpected bill once HMRC compares your PAYE against your total income at year-end.9GOV.UK. Tax Codes: If You’ve Paid Too Much or Too Little Tax
PAYE does not always capture everything, either. You may need to file a Self Assessment tax return alongside being taxed through PAYE if you have significant untaxed income from property, investments, or freelance work. HMRC can also require Self Assessment for employees whose total income exceeds £150,000 in a tax year. If you fall into that bracket and fail to register, HMRC can charge penalties for late filing on top of the tax you owe.
How This Works for Company Directors
Directors of limited companies sit on both sides of the relationship. For tax purposes, a director drawing a salary is an employee, and the company is the employer responsible for deducting and paying PAYE.1GOV.UK. Compliance Handbook – Penalties for Failure to Pay on Time: PAYE and NIC Obligations The company is a separate legal entity, so even if you own every share, the obligation to run payroll and remit tax to HMRC belongs to the company, not to you personally.
National Insurance for directors runs on an annual earnings period under the Social Security (Contributions) Regulations 2001, rather than being calculated pay period by pay period.10GOV.UK. National Insurance Manual – NIM12022 This stops directors artificially splitting income into small monthly amounts to stay below thresholds. Payroll software applies a cumulative calculation so that by the final pay period, the correct total has been collected regardless of how payments were spread.
Where directors get caught out is assuming the corporate shield is absolute. If the company fails to pay its PAYE and National Insurance, HMRC can look through the structure and hold directors personally liable, particularly where the failure was deliberate or reckless.
Contractors and the Off-Payroll Working Rules
When a self-employed contractor works through their own limited company, that company is normally responsible for deciding whether the engagement looks like employment and handling the tax that follows. The original intermediaries legislation in Chapter 8 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003 placed this obligation on the worker’s intermediary.11Legislation.gov.uk. Income Tax (Earnings and Pensions) Act 2003 – Part 2 Chapter 8
The off-payroll working rules in Chapter 10 of Part 2 of ITEPA 2003 shifted that responsibility to the organisation receiving the services. Public sector bodies have been subject to the rules since April 2017, and medium and large private sector businesses followed in April 2021.12GOV.UK. Understanding Off-Payroll Working (IR35) If the client determines the engagement falls inside the rules, the fee-payer, usually the organisation paying the contractor’s company, must deduct income tax and National Insurance before making payment, exactly as if the worker were on the payroll.
Small private sector businesses are exempt from making this determination. When a contractor works for a small company, the contractor’s own intermediary remains responsible for deciding whether the rules apply and accounting for any tax due.12GOV.UK. Understanding Off-Payroll Working (IR35) The small company test follows the Companies Act definition: broadly, the client meets at least two of three criteria: turnover no more than £10.2 million, balance sheet total no more than £5.1 million, or no more than 50 employees.
Pension Providers Operating PAYE
PAYE does not stop when you retire. Pension providers, whether insurance companies, former employers running occupational schemes, or personal pension administrators, operate PAYE on the payments they make to you. Your provider uses the tax code HMRC assigns to your pension to work out how much income tax to withhold.13GOV.UK. Tax When You Get a Pension – How Your Tax Is Paid If you draw both a State Pension and a private pension, HMRC typically asks one of your private providers to collect the tax owed on both through a single adjusted tax code.
Lump-sum withdrawals can trigger a temporary overtaxation problem. Where a provider does not hold a current tax code for you, it applies an emergency code that often takes too much tax, particularly on a first or one-off withdrawal. You can reclaim the overpayment using form P53 for a small pension lump sum, or P55 if you have taken part of your pension pot.14GOV.UK. Claim a Tax Refund When You’ve Taken a Small Pension Lump Sum (P53) There is no need to wait until the end of the tax year; you can submit the form as soon as the overtaxed payment reaches you.