TL;DR

Pay As You Earn (PAYE) is the UK system by which employers deduct income tax and National Insurance Contributions (NICs) from employee pay at source, before the employee receives it, and remit these to HMRC. Any employer paying an employee or worker is legally required to operate PAYE. For staffing agencies acting as the employer of record for temporary workers, PAYE compliance is a core operational function, not optional. Failure to operate PAYE correctly can result in HMRC assessments for the underpaid amounts plus interest, penalties up to 100% of unpaid tax, and criminal prosecution in cases of fraud.

What This Means in Practice

PAYE is a real-time system. Since April 2013, HMRC has required all employers to submit payroll information to HMRC on or before the date of each payment under Real Time Information (RTI). The Full Payment Submission (FPS) must include details of each worker paid, the amount paid, tax deducted, and NICs deducted - submitted electronically before the payslip is issued. Employers also submit an Employer Payment Summary (EPS) when no payments are made in a pay period, and to reclaim statutory payments such as statutory maternity pay.

Income tax is deducted using the worker's tax code, issued by HMRC and communicated to the employer via the PAYE system. The tax code reflects the worker's personal allowance (£12,570 in 2024/25) and any adjustments for benefits in kind, other income, or underpaid tax from previous years. Workers on tax code 1257L receive the standard personal allowance and are taxed at 20% on earnings between £12,570 and £50,270, 40% between £50,270 and £125,140, and 45% above £125,140 in the 2024/25 tax year. Workers with an emergency or week-1/month-1 code are taxed differently and may receive a tax rebate at year end.

National Insurance Contributions are calculated separately. Employees pay primary Class 1 NICs at 8% on earnings between the primary threshold (£12,570 in 2024/25 on an annualised basis) and the upper earnings limit (£50,270), and 2% above that. Employers pay secondary Class 1 NICs at 13.8% on earnings above the secondary threshold (£9,100 in 2024/25). Both employee and employer NICs are remitted to HMRC together with income tax via the monthly payroll payment, due by the 22nd of the month following the pay period (or the 19th if paying by post).

For new starters without a P45 from a previous employer, the employer uses a starter checklist to determine the initial tax code and NIC category. Common mistakes include applying the wrong starter declaration (A, B, or C), which can result in the wrong amount of tax being deducted in the first pay period - often over-deduction, which generates a rebate, but sometimes under-deduction, which creates a tax debt for the worker.

Statutory payments - Statutory Sick Pay (SSP), Statutory Maternity Pay (SMP), Statutory Paternity Pay (SPP), and Statutory Shared Parental Pay (ShPP) - are all operated through PAYE. Employers pay these amounts to workers and recover the majority from HMRC via the EPS. The employer absorbs SSP in full; SMP, SPP, and ShPP can be recovered at 92% (or 103% for employers with an annual NICs bill under £45,000 under the Small Employers Relief scheme).

Why Recruitment Agencies Need to Know This

Staffing agencies are frequently the employer of record for temporary workers, which means they bear full PAYE responsibility even when the worker is physically located at a client site and the client controls day-to-day activities. The agency that operates the payroll is the employer for PAYE purposes. The client's instructions to the worker do not shift PAYE liability to the client under a standard agency supply arrangement.

For high-volume agencies running weekly payrolls for thousands of workers, PAYE accuracy is a continuous operational challenge. Errors in tax code application, starter checklist processing, or holiday pay calculations create cumulative tax over- or under-deductions. Workers who receive significant tax bills at year end due to agency payroll errors generate complaints, sometimes Tribunal claims for unlawful deduction from wages, and reputational damage.

The most common PAYE compliance failure in staffing agencies is the failure to operate PAYE on all relevant payments. Shift bonuses, retention payments, referral bonuses, and non-cash vouchers are all subject to PAYE and NICs. Agencies that make these payments outside the payroll system - as "expenses" or in cash - are operating an unofficial parallel payment arrangement that HMRC classifies as tax evasion when the amounts are material and persistent.

For off-payroll workers (IR35 arrangements) where the staffing agency is the fee payer, PAYE must be operated on the deemed employment payment from the contractor's PSC. This is separate from the agency's own employee payroll and must be handled through the same RTI system. Some agencies run this through a separate payroll entity to maintain clean separation, but the RTI and remittance obligations are identical.

In Practice

A contact centre staffing agency processes weekly payroll for 1,400 temporary workers across 12 client sites. The payroll team uses the same ATS-integrated workflow that Candidately links into for time capture, ensuring hours approved by client site managers flow directly into the payroll calculation without manual re-entry. On Friday, the payroll system calculates gross pay, applies each worker's HMRC-issued tax code, deducts employee NICs, and generates the FPS for submission. The submission clears by 3pm, before payslips are issued at 5pm.

On the following Tuesday, the payroll team identifies that three workers were processed on emergency tax codes because their P45s arrived after the payroll cut-off. The team issues corrections in the following week's payroll once the correct codes are loaded, and sends the workers written explanations of the adjustments. HMRC receives the corrected FPS within the statutory deadline.

At the end of the tax year, the payroll team submits P60s for all workers employed at 5 April and ensures leavers received their P45s within the statutory timeframe. The April remittance to HMRC is cross-checked against the year-to-date FPS submissions to confirm no discrepancies. The agency's annual HMRC payment - income tax, employee NICs, and employer NICs - amounts to £4.2 million across the workforce.

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