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 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 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 employers responsibility to make the deductions before paying the employee and it applied to all employees including directors of their own limited company. In addition Class 1A NIC is payable by the employer on benefits and is payable at the end of each year.
It is the employers responsibility to follow the rules, make the right deductions
and make the payment to HMRC which is usually by the 19th of every month unless paying electronically (22nd) or have average monthly payments of less than £1500 in which case you can pay quarterly.
When you take on your first employee you may wish you hadn't when faced with all the forms and regulation that need to be followed. The rates, allowances and regulations also all change on a regular basis 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 are declared to the HMRC by means of an end of year benefits form P11D or P9D.
New Employees
Every employee has their own tax code which is issue to them by HMRC and the employer provided with details as well.
For new employees this tax code is provided on the 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, they should complete a form P46 in order to get one and be given a single persons tax code for use in the meantime.
The PAYE Paperwork
There are numerous forms in the PAYE system but there are certain core forms which are used by all employers, the most common of which are as follows...
- Pay slips - which are your own 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.
- P11 Deductions working sheet - this may be manual or computerised but records all the salary and NIC payments made.
- P14/P60 - this is the end of year summary. which is given to the employee and copies to HMRC.
- P35 - this is the Employer's Annual Return which summarises all deductions made from employees in the year to 5th April
- P11D - used at the end of each tax year to provide details of benefits and expenses paid to employees.
How We Can Help You
We can assist you with training in running your own PAYE scheme or can arrange to have the payroll run for you.
Got a Question?
If you have any queries on any of the above, please ask a question
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