How Paye can help your business

What is Pay?

PAYE (PAY AS YOU EARN) is an HMRC system for collecting income tax and national insurance from employees’ wages. Payroll is used by employers to deduct applicable taxes from their employee’s salary prior to payment. This helps employees ensure that their correct amount of tax is paid for the tax year, while reducing any potential tax liability for employers.

Employers need to do some basic steps for PAYE:

• Register with HMRC as an employer
• Train whether each employee is employed or self-employed
• Report the total amount of tax the employee earned during the tax year, before any deductions
• Calculate, deduct and pay all PAYE, National Insurance contributions and student loan deductions
• Submit an Employer Payment Summary (BPA) with HMRC, to show the total amount of PAYE and NIC deductions each month

Additionally, employers may also need to provide their employees with a P60 form at the end of the tax year proving their gross pay and deductions for the tax year.

Employers must ensure that their calculations for employee deductions are correct; This could be achieved by visiting the HMRC website or seeking advice from an accountant.

Key points to remember

• PAYE is a system used by employers to deduct income tax and National Insurance from employee wages.
• It is important for employers to register for PAYE before employing someone or before making deductions.
• The PAYE system helps employers pay the right amount of tax, as well as reduce potential tax liability.
• Employers must submit an Employers Payment Summary (BPA) with HMRC, to show the total amount of PAYE and NIC deductions each month.

How does PAYE work?

Pay (Pay As You Earn) is a system that employers use when deducting income tax and national insurance contributions from employees’ wages. It works by calculating the correct amount of tax and national insurance for employees who are classified as taxpayers. Relevant tax codes are applied to employee benefits, then the employer deducts tax and national insurance from their salary or wages before paying them their net salary.

All employers are required to register for PAYE before they start employing someone, or before they start making deductions from employees’ wages. They must obtain a PAYE reference from HM Revenue and Customs (HMRC) for each employee and use it when deducting tax and NI.

An employer must keep records of all income tax and national insurance deductions made from employees’ wages and submit them to HMRC. This is done through a Full Payment Submission (FPS). The employer’s PAYE obligation to HMRC usually ends when they lay down the employee’s salary or their accounting year ends.

Here are some examples of PAYE deductions:

• income tax deductions taken directly from employees’ salaries, adjusted by a tax code;
• deductions for national insurance contributions; And
• Deductions for work pensions.

Below are some useful tips for employers regarding the PAYE system:

• Make sure you let HMRC know before you start using anyone or if it changes.
• Check that you pay your employees the minimum wage required by law.
• Ensure that all employee salary changes, such as bonuses or commissions, are correctly included in PAYE deductions by completing a Compensation Adjustment Form (PAYE AP).
• Use extra care when disappointing tax and national insurance from employees who work part of the year abroad.
• Submit payroll FPS returns accurately and on time to HMRC.

What are PAYE tax codes?

Pay or Pay when you earn tax codes are numeric codes used to define the rate of tax payable from profits or other income, such as state pensions or self-employment earnings. Tax codes are assigned by HM Revenue & Customs (HMRC).

Each tax code consists of several numbers and letters and has a defined meaning:

• The first digit (or two digits) shows the percentage of tax amount to be deducted.
• The letter in the middle of the code means personal allowance.
• The remaining numbers and letters at the end of the code help explain the personal allowance.

For example, tax code 1185L means that:

• 1185 = the percentage of tax to be deducted (1185L = a tax rate of 20%; 1150L = a tax rate of 40%)
• L = the personal allowance, in this example £12,500

If you are an employee, you can assign yourself a tax code which you can find on your pay packet, or if you are self-employed on your annual tax summary. It is important to verify that your tax code is correct to ensure that you pay the correct amount of tax.

If you believe your tax code is incorrect, or it is not present on your slide, you should contact HMRC to confirm the correct tax code and ensure that your correct tax payments are made.

What’s included in Paye?

PAY TOME YOU GERNE (PAYE) is a system used by employers to collect income tax and national insurance deductions from wages from their employees each time they are paid. It allows these deductions to be made in a simple way, ensuring that employees pay the correct amount of tax.

Pay includes the following deductions:

• Income Tax: This is collected at the standard marginal rate for each employee, based on their salary.
• National Insurance Contributions: Employees pay this based on their earnings, and employers must match their contribution.
• Replenishment of Student Loans: Employees with student loans may also be subject to withholding repayments.

Employers must operate PAYE by registering with HMRC, creating a PAYE system and submitting payroll information online each year. It is important to take these deductions into account in order to prevent employees from being charged for unpaid taxes at the end of the fiscal year.

Are there any PAYE exemptions?

PAY TOME You Earn (PAYE) is a tax system that requires employers to withhold taxes from employees’ wages before paying them. Although Paye is mandatory for most workers, there are some exemptions.

In some cases, such as some charities and businesses, employers may be exempt from PAYE rules. Depending on the type of exemption, employers may be completely exempt from PAYE or just certain PAYE obligations.

Examples of PAYE exemptions include:

• Certain charities, such as churches and religious organizations with charitable status, may be exempt from PAYE.
• Employees of certain international companies, such as embassies and foreign governments, may be exempt from PAYE as they may be governed by different tax regulations.
• Employers may also be exempt from certain PAYE rules, such as the real-time information filing requirement.

Employers should contact HM’s Revenue and Customers Office to determine if they qualify for an exemption from the PAYE rules. Employers must provide evidence to support their exemptions, such as a certificate of charitable status.

How do I sign up for PAYE?

If you are an employer, you must register for PAYE with HM Revenue and Customs (HMRC) if you have employees who receive wages, salaries or pensions. It’s important to sign up for PAYE, even if you’re using someone only on a part-time or temporary basis, as failure to do so may result in a penalty.

In order to sign up for PAYE, you must complete the following steps:

• Check if you are eligible. To qualify, you must pay your employees at least £113 per week after income tax and national insurance deductions.
• Register your business for PAYE online on the HMRC website. Here you will need to provide your business name, address and contact details, as well as any registered business number.
• Once you have registered, you will receive a 10-digit employer PAYE reference number. You should keep this number safe as it will be used in all future dealings with HMRC.
• You must also inform your employees, who must use their PAYE reference number on any form or document they submit to HMRC. You must provide them with all the relevant information they need to complete a P45 or P46 form when they start working.
• Once you are registered, you must create a payment schedule with your bank or building society. This will allow HMRC to collect the necessary deductions.

It is important to remember that you must inform HMRC if your details change, such as your contact details or the total number of employees. You should also pay any money you owe to HMRC on time, as late payments can result in penalties.

How often and when should I submit PAYE statements?

Employers must submit the payroll data they have processed to HMRC through PAYE Settlement Agreements (PSAs), which are submitted quarterly. For example, if the 2019 to 2020 tax year ends on April 5, the PSA must be paid on July 19.

Additionally, even if the employer does not have to pay PSA, they still need to submit a Full Payment Submission (FPS) to HMRC. This is sent by the 19th of the following month after the payroll processing month, for example April, payroll should be sent on May 19th. An additional FPS submission will be required sooner if there are payroll changes, such as the employee leaving their current job.

The following table summarizes the requirements and submission dates for PAYE Settlement Agreements and Full Payment Submission.

• PAYE Settlement Contract – Must be submitted quarterly on July 19, October 19, January 19 and April 19
• Full Payment Submission – Must be submitted by the 19th of the following month, plus an additional submission if payroll changes

As such, employers should take precautions to submit the correct documents to HMRC on time. Late submission of returns may result in fines and interest and other necessary corrective action issued by HMRC.

Conclusion

PAYE is an HMRC system that helps employers ensure their employees pay the right amount of tax, while reducing any potential liability. Employers should use extra care when deducting their employees’ tax and national insurance and ensure they submit their FPS returns to HMRC accurately and on time. Additionally, employers should be sure to give their employers a P60 form at the end of the tax year to prove their deductions for the tax year.