Understanding UK income tax for employers
Reviewed by Mellow Editorial Team, HR & payroll content team
Employers do not pay income tax on behalf of employees — but they are legally responsible for calculating it correctly, deducting it from pay, and sending it to HMRC on time. Get it wrong and the liability falls on you, not the employee.
How income tax works under PAYE
Income tax is collected through Pay As You Earn (PAYE). As an employer, you act as the collection agent: you deduct the right amount from each employee's gross pay before the money reaches them, then pass it to HMRC.
The rates for 2026/27 are:
- Personal allowance: £12,570 (income up to this amount is tax-free)
- Basic rate: 20% on income above £12,570 up to the higher-rate threshold
- Higher rate: 40% on income above the higher-rate threshold
- Additional rate: 45% on income above the additional-rate threshold
You do not need to apply these thresholds manually. HMRC translates them into a tax code for each employee, which your payroll software uses to calculate the correct deduction each pay period.
Tax codes and what they mean
Every employee has a tax code, issued by HMRC. The most common is 1257L, which reflects the standard personal allowance of £12,570. Other codes indicate adjustments — for example, an employee with taxable benefits in kind, multiple jobs, or underpaid tax from a previous year.
When a new employee starts, they should give you a P45 from their previous employer. If they do not have one, use a starter checklist to determine the right code to apply temporarily. Using the wrong code — or leaving someone on an emergency code longer than necessary — creates incorrect deductions that have to be unwound later.
HMRC can also issue a tax code directly to you via a P6 or P9 notice. When that happens, update the employee's record immediately for the next payroll run.
Reporting to HMRC in real time
Under Real Time Information (RTI), you must submit a Full Payment Submission (FPS) to HMRC on or before each payday. The FPS tells HMRC who you have paid, how much, and what deductions you made — including income tax and National Insurance.
If you pay an employee and forget to submit an FPS, or submit one late, HMRC will raise a late-filing penalty. There is no minimum threshold: one missed submission counts.
Alongside income tax, you will also deduct employee National Insurance at 8% (with 2% above the upper earnings limit) and pay employer National Insurance at 13.8%. These go through the same FPS and are paid to HMRC as part of the same monthly or quarterly PAYE bill.
Year-end obligations
At the end of each tax year, two documents matter:
P60 — You must issue every employee who is still employed on 5 April with a P60 by 31 May. It summarises their total pay and deductions for the year. Employees need it to complete self-assessment returns or to check their tax record.
P11D — If any employees received benefits in kind — such as a company car, private medical cover, or interest-free loans — you must report these to HMRC on a P11D by 6 July. Benefits not processed through payroll are taxable, and the P11D is how HMRC knows to collect that tax.
If you payroll your benefits (i.e. add their taxable value to gross pay each month rather than reporting annually), you may not need a P11D for those specific benefits — but you must register with HMRC before the start of the tax year to do this.
Common mistakes and how to avoid them
Applying the wrong tax code. Always act on HMRC coding notices promptly. Check your payroll software settings when a new tax year begins, since codes can be uprated automatically — but not always correctly if the employee's circumstances have changed.
Failing to update payroll after a change in employment status. If an employee moves from part-time to full-time, takes a second job, or starts receiving a taxable benefit, their tax position changes. Notify HMRC through your normal RTI process and update records accordingly.
Missing payment deadlines. PAYE (covering both income tax and National Insurance) is due to HMRC by the 19th of the following month if paying by post, or the 22nd if paying electronically. Consistent late payment attracts surcharges.
Overlooking new starters and leavers. For leavers, issue a P45 promptly. For starters, collect a P45 or completed starter checklist before the first payday. Getting this right at the start prevents months of incorrect deductions.
For businesses managing employees across multiple countries, the compliance layer increases significantly — how Mellow runs payroll across six countries on one platform explains how a unified approach reduces that administrative burden.
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