PAYE stands for “Pay As You Earn” and is essentially a government system of paying income tax and national insurance contributions (NIC) across the country. The employer will tally up how much tax and NIC an employee needs to pay and deduct it before paying the wages or pension. These contributions are included in the pay slip, for the employees to double check the amount taken. Everyone, except the ones who are self-employed is required to pay PAYE tax.
Wages include sick pay, maternity or paternity pay, adoption pay and any other specialist pay. PAYE allows employees to pay tax over the whole year, every time they get paid, instead of paying all at a once. Employers are responsible for sending all the information about employees’ wages and deductions to HMRC (HM Revenue and Customs). They also need to provide employees with a payslip detailing all the information about the wages paid along with the details of the national insurance contributions, taxes and other deductions from the salary.
Basically, a tax year runs from 6th April to the 5th April of the following year. At the end of every tax year, employees will be provided with a P60 form which describes all the information about the total wages received and the amount deducted for the previous tax year.
PAYE system can also be used to pay the taxes on any taxable income a person has. For instance, if a person is paying tax on his/her occupational pension, with the help of PAYE system the tax due on State Retirement Pension can directly be deducted from the occupational pension.
In addition, the PAYE system can also be used to pay the tax due on all the other income sources including rent and untaxed interest. Besides this, other amounts that you owe to HMRC, such as tax debts from previous years; unpaid self-employed national insurance contributions or tax debts can be paid using the PAYE system.
A tax code is used by HMRC to educate employers and pension providers on how much tax they need to deduct from the wages or pension. These PAYE codes are made up of a number and a letter.
There are numerous ways that an employer or pension provider can use to work out PAYE and calculate the amount they need to deduct from their staff’s salary for tax and national insurance contribution. However, it is wise to seek the help of a professional accountant or a payroll specialist to get the job done.
PAYE involves a quite complex process and an employer will need an employee’s tax code. Later, based on the annual salary of the employee, employers calculate tax and national insurance contributions they need to pay. This amount can be divided either for monthly or yearly payments.
If you are an employer with staff getting paid more than £113/week, you need to register for PAYE. Before every payday, you need to inform HMRC about the amount of tax and NI your every employee will be paying at the end of every month. Enrolling for PAYE ensures that your employees’ tax and NI amounts are paid.
Basically, there are two options for operating PAYE:
PAYE registration can take up to 2 weeks. Need not to be said, you need to get registered in advance of the first pay day.
Listed below are the basic steps you need to follow while setting up your company’s payroll:
Any payment that is made to an employee is supposed to be added in the PAYE system. It includes:
As an employer, you need to find out about the deductions required to be made from the employee’s wages, in order to comply with NI and tax regulations. This amount is calculated on the basis of the national insurance letter and the employee’s tax code.
Recommended by HMRC, listed below are the seven things that you need to do before employing any personnel for the first time.
As an employer, you need to inform HMRC when a new employee joins or when an existing employee’s circumstances change. For example, the employee gets a promotion or reaches State Pension age. At the end of every tax year, you need to run annual reports which also include informing HMRC about any benefits or expenses.