PAYE The basic information every employer should be aware of
Introduction
PAYE (Pay as you earn) is the HM Revenue & Customs (HMRC) system for collecting income tax from employees (including directors) as they earn it. This article explains the very basics of the PAYE system and how to implement it.
It is essential reading for all prospective employers.
Why does PAYE exist?
PAYE is the system whereby HMRC can collect income tax and National Insurance contributions (NICs) from employees. By requiring the employer to deduct the amount and submit it to the HMRC the middle-man is cut out, making the process more efficient.
Employer's responsibility for PAYE
If you employ people, including any directors of a limited company, you will need to deduct income tax and National Insurance contributions (NICs) from their pay before they receive it.
As an employer, you need to know how to calculate the correct income tax deductions, taking account of the various rates, allowances and limits that exist.
When do I deduct the money from the employee’s pay?
Deduct the contributions every time you pay the employee. Depending on the industry you are in, this could be weekly, bi-weekly, or perhaps monthly.
How often do I pay the HMRC?
By the 19th of each month - or, if you make electronic payments, by the 22nd of each month - you will have to send the most recent amounts you have deducted from all your employees' pay to HM Revenue & Customs (HMRC). If your average monthly payments are likely to be less than £1,500 you may be able to pay them quarterly.
If you pay too little or too late, you may incur interest on these amounts, or even worse, a fine.
Are benefits taxable?
Employees and directors are also taxed on benefits in kind, such as a company car or medical insurance, and as an employer you will have to pay Class 1A NICs on benefits as employer. You do not have to pay these contributions under the PAYE (Pay As You Earn) system - you do so at the year end. These are called taxable benefits.
What is PAYE Online?
You can also manage your PAYE online using PAYE Online for Employers. Once registered you can complete form P11D using either third-party software or the free HMRC "Online Return & Forms - PAYE" product.
Getting started with PAYE
When you first start employing people, you may find it a challenge dealing with all the forms and procedures involved in organising your payroll. You will learn the parts of the PAYE (Pay As You Earn) system that apply to your particular business situation in stages, as and when they apply to your business.
At first, many employers decide to use an outside supplier - usually an accountant - to run their payroll for them. An experienced accountant can tell you what systems and forms to use, making sure you don't miss out any essential steps.
Alternatively you could use a payroll agency, but remember you are still legally responsible for any mistakes. You could invest in a payroll software package, but it must comply with HM Revenue & Customs (HMRC) standards.
To get you started
Ring the HMRC New Employers Helpline. They will advise you on what you have to do first and will help you find your way around the PAYE and National Insurance contribution systems;
Get free confidential advice from your local Business Support Team on a one-to-one basis at any location which suits you. Find contact details of your local Business Support Team at the HMRC website;
Get a starter pack by calling the HMRC New Employer Helpline on Tel 0845 60 70 143. The pack contains taxable pay tables and pay calculators, as well as all the essential forms and information.
When to apply PAYE
PAYE (Pay as You Earn) is applied to all payments an employee receives as a result of working for you, including:
Salary and wages;
Overtime, shift pay and tips;
Expense allowances and claims (this only applies where these are paid in cash and, for expense payments, only if they fall within specific criteria - for more details, see our guide on business expenses and dispensations);
Bonuses and commission;
Statutory Sick Pay;
Statutory Maternity/Paternity/Adoption Pay;
Lump sum and compensation payments - such as redundancy payments - unless they are exempt from tax.
Tax relief on other deductions
If you give employee payments other than in cash, such as shares or vouchers, PAYE must be applied to the cash value of such items. Childcare arranged and paid for by an employer and childcare vouchers provided by an employer, up to a value of £55 a week, are exempt from tax and National Insurance, subject to the following conditions:
The care used must be registered childcare or approved home childcare;
Where a childcare benefit-in-kind scheme operates it must be available to all employees.
Income tax and National Insurance contribution rates and thresholds may change from year to year.
Employee tax codes
Each taxpayer has a personal tax code issued to them by HM Revenue & Customs (HMRC). You will find this code on a new employee's form P45. You use the code together with HMRC taxable pay tables to work out how much tax to deduct from your employee. You can look up taxable pay tables on the HMRC website.
New employee without a P45
If you’re new employee doesn't have a form P45 and therefore there isn't a tax code for you to use, they will probably need to complete a form P46 - which can be done using PAYE Online for Employers.
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