PAYE Fundamentals
PAYE stands for Pay as You Earn and is the system used by HMRC to collect income tax and national insurance from employees as well as the employer's national insurance. The employer makes the necessary deductions from the pay of the employee and pays them over to HMRC.
It is the employer's responsibility to make the correct deductions before paying the employee and this applies to all employees including directors of their own limited company. The deductions must be paid to HMRC by the 19th of every month unless paying electronically when the money must reach HMRC by the 22nd. If however, you have average monthly payments of less than £1,500 you can pay quarterly.
In addition, Class 1A NIC is payable by the employer on benefits and is payable by the 19th of every month unless paying electronically when the money must reach HMRC by the 22nd after the end of each tax year.
When you take on your first employee you may wish you hadn't when faced with all the forms and regulations that need to be followed. The tax rates, allowances, and regulations also all change regularly and it can be hard to keep up to date. If you just have a few employees it is often simpler to get your accountant or a payroll agency to do the payroll for you.
Application of PAYE
PAYE applies to all types of payments you make to your employees including...
- Salary and wages
- Bonuses and commission
- Overtime
- Tips
- Expense allowances and claims when paid in cash
- Statutory Sick Pay
- Statutory Maternity/Paternity/Adoption Pay
- Lump sum and compensation payments including redundancy unless they are exempt from tax
- Payments other than in cash, such as shares or vouchers
Certain benefits provided to employees may be exempt from tax but most are taxable and must be declared to the HMRC using an end-of-year benefits form P11D or P9D.
Real-Time Information (RTI)
RTI came into effect for most employers from 6 April 2013 and is the system for reporting pay, tax, National Insurance, and other details to HMRC.
You need payroll software or a payroll service provider to file RTI returns.
New Employees
Every employee has their tax code which is issued to them by HMRC and the employer is provided with the details as well. For new employees this tax code is provided on the form P45 they bring from their previous employment. This is used in conjunction with the relevant tax and national insurance tables to work out the tax and NI to be deducted. If the employee does not have a form P45, you and the employee should complete the HMRC Starter Checklist or equivalent to get a tax code. In the meantime, the tax code used depends upon the statement selected in the Starter Checklist.
The PAYE Paperwork
There are numerous forms and submissions in the PAYE system but there are certain core forms/submissions which are used by all employers, the most common of which are as follows...
- Pay slips - which are the forms you supply to your employees to show how their pay has been calculated and the deductions made.
- Form P45 - as explained above, new employees with a previous job give you a copy of this from their previous employer and you provide employees who leave your employment with one.
- RTI Full Payment Submission (FPS) - filed on or before each payday. It deals with pay details as well as starters and leavers.
- RTI Employer Payment Submission (EPS) - to notify HMRC of any reductions to the monthly tax, NI, and student loan values submitted via the FPS.
- P60 - this is the end-of-year summary that is given to the employee.
- P11D - used at the end of each tax year to provide details of benefits and expenses paid to employees who earn over £8,500 and all directors.
How We Can Help You
We can assist you with training in running your PAYE scheme or can arrange to have the payroll run for you.
