PAYE must be operated by any organisation with employed workers, whether full-time or part-time. It is applicable for all payments given to an employee in return for work performed. The PAYE system covers both income tax due by the employee and National Insurance (NI) contributions due from both employee and employer. You have to operate the system in accordance with detailed rules set by HMRC. This usually involves calculating tax and NI monthly (or weekly if you pay wages weekly) and making monthly payments to HMRC by the 19th of the month following payday. There are penalties for late payment and for late submission of forms.

As well as wages and salaries, PAYE also applies to overtime and shift pay, commissions, bonuses, one-off or lump sum payments, sick pay, maternity pay, paternity pay, adoption pay, holiday pay and tips that are collected by the employer and then distributed to employees. Some payments made on the termination of employment may be subject to tax, such as contractual redundancy pay, although HMRC may agree to exempt amounts up to £30,000. Statutory redundancy pay is exempt from PAYE and NI.

Every UK resident is entitled to a certain amount of tax-free pay (known as the personal allowances). These are revised each April and inform the PAYE threshold. For the tax year 2009-09 the threshold is £105 per week. For NI, there is a lower earnings limit which operates in a similar way. You can check on the current thresholds on the HMRC website.

Many small organisations buy in a payroll service as it can be more efficient and ensure that people who fully understand the rules are administering your PAYE. Payroll services are provided by local accountancy firms as well as local voluntary and community sector organisation like Community Accountancy Services and Councils for Voluntary Service.