Pay As You Earn (PAYE)

Pay As You Earn (PAYE) is a tax withholding system where employers deduct income tax and social contributions directly from the employees’ wages before paying out the net pay. It can be compared with government’s way of ensuring nobody “forgets” to pay their taxes at the end of the year.

The concept is straightforward: instead of hitting employees with a massive tax bill in April the following year, PAYE spreads the tax payments across every pay-check. Every time payroll is ran, it’s calculated what the employee owes, deducted from their gross wages and paid out to the relevant tax and social insurance authorities. The employee receives their net salary, and the government gets its money.

While “PAYE” is most commonly associated with the United Kingdom (where it’s been around since 1944 – thank you, wartime revenue needs), similar withholding systems exist under various names across the globe. Germany, Netherlands, South Africa, New Zealand, and Australia all operate PAYE payroll and tax systems. Even if a country doesn’t call it “PAYE,” chances are they have something functionally identical.

If you’re hiring employees internationally, whether through your own entity or via an Employer of Record (EOR), PAYE compliance isn’t optional. As the legal employer, you (or your EOR) are responsible for:

• Registering with the local tax authority
• Correctly calculating tax and social contribution deductions
• Withholding the right amounts from each paycheck
• Remitting those funds to the government on time
• Filing regular reports (in the UK particularly, this means Real Time Information submissions to HMRC)

If you’re getting any of this wrong, you’ll most certainly be looking at penalties, interest charges, and, worst-case scenario, an interview with tax investigators.

In this section, we’ll break down in four steps how PAYE works:

Step 1: Setting Up The Employee

When you hire someone in a PAYE jurisdiction, they’re usually assigned a tax code based on their personal allowances, other sources of income, and any relevant deductions. In the UK, HMRC issues these codes. In other countries, the local tax authority does the equivalent.

Step 2: Payroll Calculation

Within each pay period, you calculate:

• Gross income or earnings (such as salary, bonuses, commissions and taxable benefits)
• Income tax based on their tax code and total amount of earnings
• Social contributions (National Insurance in the UK, PRSI in Ireland, Socialversicherung in Germany, etc.)
• Any other statutory deductions (student loan repayments, pension contributions, etc.)

Step 3: Deduction & Payment

Deduct all of the above from the employee’s gross pay. Pay them the net amount. Fairly straightforward, until you’re doing it across multiple countries with different rules, rates, and deadlines.

Step 4: Remittance & Reporting

Send the deducted taxes and contributions to the relevant tax authority. File the required reports. In the UK, this means submitting Full Payment Submissions (FPS) on or before each payday.

If you’re expanding internationally, take into considerations some PAYE-related headaches to watch out for:

Multiple Employments

In most PAYE countries, tax-free thresholds only apply to one job. If an employee works multiple jobs or has multiple incomes, their secondary employment is often taxed at higher marginal rates from the first dollar. This can cause serious discrepancies that require year-end reconciliation.

Benefits-In-Kind

Company cars, private healthcare, gym memberships. These aren’t free from a tax perspective. Many PAYE systems require employers to report and pay tax on non-cash benefits. The UK’s P11D form exists specifically for this purpose.

Freelancers vs. Employees

PAYE applies to employees, not self-employed contractors. But here’s where it gets spicy: misclassify a worker, and you could be liable for unpaid PAYE taxes. The UK’s IR35 regulations are specifically designed to catch “disguised employment” where contractors are really employees in all but name.

International Complexity

Every country’s PAYE equivalent has different rates, thresholds, filing deadlines, and rules. What works in the UK doesn’t necessarily translate to South Africa or Ireland. If you’re hiring globally, you need country-specific expertise, or a partner who has it.

This is where in today’s modern world of global employment, an EOR can add tremendous value and safe you tons of headache.

When you hire through an Employer of Record, they become your local, legal employer in that country. That means they’re responsible for:

• Signing a compliant local employment contract between your employee and a local legal entity in the country (the EOR entity)
• Registering with the employee(s) with local tax authority (so you don’t have to)
• Calculating and withholding PAYE correctly each pay period
• Remitting taxes and contributions to authorities on time
• Filing all required reports and paperwork
• Staying compliant when rates and rules change

For companies without a local entity, this is massive. Setting up proper PAYE infrastructure in a new country requires legal expertise, accounting systems, local banking, and ongoing compliance monitoring. An EOR handles all of this out of the box.

What to Look for When Evaluating an EOR

Of course, not all EORs are created equal. When evaluating providers, it’s worth asking:

• Do they have their own entity in-country or do they use a local EOR partner?
• How do they handle PAYE calculations and reporting?
• What’s their track record on compliance?
• How transparent are they about what’s being deducted and why?

The best EORs give you (and your employees) full visibility into gross-to-net calculations, tax withholdings, and statutory contributions. The worst leave you guessing, especially with in-transparent invoices, something goes wrong.

→ If you’re looking to find the best EOR, our Best Global EOR Guide might be of interest to you.

For reference, here are the current UK figures:

These rates change annually, and other PAYE countries have completely different structures. Always verify current rates with the relevant tax authority or your EOR.