PAXX is a recently identified component of the nonhomologous end joining (NHEJ) DNA repair pathway. The molecular mechanisms of PAXX action remain largely unclear. Here we characterise the interactomes of PAXX and its paralogs, XLF and XRCC4, to show that these factors share the ability to interact with DNA polymerase λ (Pol λ), stimulate its activity and are required for recruitment of Pol λ to laser-induced DNA damage sites. Stimulation of Pol λ activity by XRCC4 paralogs requires a direct interaction between the SP/8 kDa domain of Pol λ and their N-terminal head domains to facilitate recognition of the 5′ end of substrate gaps. Furthermore, PAXX and XLF collaborate with Pol λ to promote joining of incompatible DNA ends and are redundant in supporting Pol λ function in vivo. Our findings identify Pol λ as a novel downstream effector of PAXX function and show XRCC4 paralogs act in synergy to regulate polymerase activity in NHEJ.