Guide to PAYE Tax

Hannah Williamson

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15 Dec 2020

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If your business has expanded to where you’re thinking about hiring someone, it’s important to do some research about payroll. This is an area where small businesses traditionally fall down.

This is because payroll can get complicated, quickly.

Most people pay income tax through PAYE. In this article, we’ll look at how you use this system and whether you should be paying it.

What is PAYE?

It stands for Pay As You Earn (PAYE) and it’s the system set up by HMRC to collect Income Tax and National Insurance from employment.

You use it to deduct the correct amount of tax and national insurance contributions before paying employees their wage or pension. Each month you send these deductions to HRMC.

What does PAYE mean for you?

It makes paying income tax and national insurance much easier for employees. However, this means there is a lot of responsibility on employers instead. This is why smaller businesses often trip up on these matters.

You must make PAYE payments monthly and you report your employees’ payments and deductions to HMRC by each payday. If you fall behind on these payments, the HRMC may fine you and any outstanding payments will generate additional interest payments.

This makes it essential to understand the system and to make sure your employees are being taxed properly.

Should I be paying PAYE tax?

Usually, yes. As an employer, you have a legal obligation to operate PAYE on the payments you make to your employees if their earnings reach the National Insurance Lower Earnings Limit (LEL).

You need to use PAYE if any of your employees meet one or more of the following criteria:

  • They earn £120 a week or more
  • They claim expenses and/or receive employee benefits
  • They have another job
  • They receive a pension from you

As soon as you’ve employed someone who falls into this category, you need to register your business as an employer with HMRC. You can do this online.

Even if you don’t need to use PAYE but you do employ people, you need to keep payroll records.

Independent contractors and freelancers you hire aren’t technically your employees and will need to take care of their own taxes. So there is no need to deduct taxes from their invoices, even if they do work for you regularly.

How does PAYE work?

HMRC will provide you with a tax code that will tell you how much tax to deduct from staff wages. Before this happens, you must collect employee information. You’ll need:

  • Date of birth
  • Gender
  • Full address
  • Date of first employment

You’ll also need information from their P45, including:

  • Full name
  • Leaving date of previous role
  • Total pay and tax paid to date
  • Student loan deduction status
  • NI number
  • Existing tax code

If HMRC doesn’t have enough information on a particular employee, they’ll issue an emergency tax code. You’ll be able to use this until they give further information and they can provide a more accurate tax code.

Once you have a PAYE tax code, you must make deductions and pay them over to HMRC. There are several ways you can do this. The method you choose will determine how long before the deadline you should pay.

For example, if you pay online or via telephone banking, you can usually pay on the deadline day itself. However, if you pay by direct debit or BACs, then you should do this 3-5 days prior to the deadline.

PAYE deductions

When you have the employee’s details, you will be able to determine how much you need to deduct from their wages. These deductions can vary depending on the individual. The forms of deductions that can be made are as follows:

  • Employee Income Tax deductions
  • Student Loan repayments

You must make payment to HMRC by the 22nd of the next tax month if you pay monthly. If you don’t pay monthly but quarterly, then you must pay after the end of the quarter on the 22nd. So, for example, you would pay on 22nd July for the 6 April to 5 July quarter.

PAYE on expenses and benefits

Different tax and NICs procedures apply to expenses and benefits – such as company cars or medical insurance that you provide to your employees.

In certain cases, you must operate PAYE on the value of an expense or benefit in the same way as for the various payment types listed above. But more typically, you must report the expenses or benefits you’ve provided to HMRC at the end of the tax year and make a one-off payment of Class 1A NICs on the value of some of them.

Pay statements

You must give each of your employees a pay statement, or payslip, at or before the time that you pay them.

This can be in either paper or electronic format but it must show certain items, including each employee’s gross pay (before you make any deductions), all deductions and the purposes for which they are made, and the net amount payable after the deductions have been made (also known as take-home pay).

If you don’t give your employees an itemised payslip, they could complain to an employment tribunal.

At the end of each tax year, you must give them a summary of their pay and deductions on a form P60. This applies to employees who have worked for you for the full tax year.

Expert support

If you need support with PAYE tax, or an HR or health & safety issues, you can receive expert advice today. To contact our team of experts, call 01455 858 132.

About the Author

Hannah Williamson is a CIPD Qualified HR professional with over 10 years’ experience in generalist HR management working within the Manufacturing Industry.

Working for a Global manufacturer provided Hannah with the opportunity to work in America and across Europe supporting HR functions and the wider business.

Hannah is Croner’s Advice Manager, taking responsibility for overseeing the provision of advice to all Croner clients, bringing together our Corporate, Simplify and Association service provisions.

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