Understanding PAYE: A Guide for Small Employers in Scotland

If you’re hiring employees — or even just paying yourself as a director of a limited company — then you’ll likely need to set up and manage PAYE (Pay As You Earn). As a small business owner in Scotland, understanding how PAYE works is essential to ensure you stay compliant and avoid costly penalties.

In this blog, we explain what PAYE is, when you need to register, and how to manage it efficiently for your business.

What Is PAYE?

PAYE stands for Pay As You Earn — HMRC’s system for collecting Income Tax and National Insurance Contributions (NICs) from employees’ wages or salaries. As an employer, it’s your responsibility to:

• Calculate your employees’ tax and NICs

• Deduct it from their pay

• Send the correct payments to HMRC

• Report payroll information on or before each payday

When Do You Need to Register for PAYE?

You must register for PAYE with HMRC if:

• You have any employees earning more than £123 per week

• You pay employees who receive expenses or benefits

• You're the director of a limited company taking a salary

Even if your employee earns below the lower threshold, you may still need to keep records and submit reports.

📌 Tip: You must register before the first payday — it can take up to 5 working days to receive your PAYE reference number.

Key Components of PAYE

When you run payroll, you’ll need to calculate and report several deductions, including:

• Income Tax (based on your employee's tax code and pay)

• Employee’s National Insurance (Class 1)

• Employer’s National Insurance (additional cost for the employer)

• Student loan repayments (if applicable)

• Pension contributions (for auto-enrolled employees)

You also submit Real Time Information (RTI) reports to HMRC every time you pay employees.

What About Directors?

If you're the sole director of a limited company, you’ll still need to register for PAYE if you:

• Pay yourself a salary (even a low one)

• Want to keep NICs within the thresholds for state pension or benefits eligibility

• Combine a salary with dividend payments for tax efficiency

An accountant can help you set up the most tax-efficient director’s pay structure.

Your Ongoing PAYE Responsibilities

Once you're set up, you'll need to:

✅ Run payroll on or before payday using payroll software
✅ Submit Full Payment Submissions (FPS) to HMRC
✅ Pay HMRC by the 22nd of the following tax month (or the 19th if paying by post)
✅ Provide payslips to employees
✅ Issue P60s at the end of the tax year
✅ Report benefits via a P11D if applicable

Common Mistakes to Avoid

• Missing submission deadlines (can lead to penalties)

• Using the wrong tax code

• Forgetting to pay employers’ National Insurance

• Failing to keep up-to-date records

• Not updating software when legislation changes

How We Can Help

At Scottish Accountancy Services, we offer reliable payroll solutions tailored for small businesses, including:

• Full PAYE registration

• Payroll setup and processing

• RTI submissions

• Auto-enrolment pension support

• End-of-year reporting (P60s, P11Ds)

• Director payroll guidance

Whether you have 1 employee or 50, we’ll keep you compliant, accurate, and stress-free.

Final Thoughts

PAYE may seem complex at first, but with the right support and tools in place, it can run smoothly in the background while you focus on growing your business. Setting it up correctly and staying on top of your obligations will save you time, money, and headaches in the long run.

Need Help with Payroll?

Thinking of hiring or setting up your first PAYE scheme?
📞 Contact us today to discuss how we can manage your payroll efficiently and cost-effectively.