Whether you're a micro business or an SME, you will likely need to employ new staff. That’s why you need to know about payroll and PAYE systems.
Payroll can get complicated, quickly. Get it wrong and you could face fines, reputational damage and legal penalties.
In this article, we’ll look at what PAYE is, how it works, and who needs to pay it.
If you're a business owner or someone who manages staff, why not speak to Croner's award-winning advice line? Our team of experts can offer specialist advice on PAYE and other HR issues. Call today on 0808 145 3380 to outsource to us.
What is PAYE?
PAYE stands for Pay As You Earn. It’s a system set up by HMRC to collect employment taxes. This includes Income Tax and National Insurance from employment.
As an employer, you must register and operate a payroll scheme. This is whether you have one employee or 10.
You use it to deduct the correct amount of tax and national insurance contributions before paying employees their wages or pension. Each month you send a report with these details to HMRC.
How does PAYE help employers?
PAYE makes paying income tax and national insurance easy for employees. However, this means there is a lot of responsibility on employers instead. This often causes smaller businesses to make payroll mistakes.
You must make PAYE payments monthly as well as report your employees’ payments and adjustments to HMRC. This must be completed by each payday.
If you fall behind on these payments, the HRMC may fine you. Any outstanding payments will also generate additional interest payments.
Who needs to pay PAYE tax?
If an employee’s earnings reach the National Insurance Lower Earnings Limit then you have a legal obligation to operate PAYE.
You need to use PAYE if any of your employees meet one or more of the following criteria:
- They earn £123 a week or more.
- They claim expenses and/or receive employee benefits.
- They have another job, or this isn't their only income.
- They receive a pension from you.
You need to register your business as an employer with HM revenue as soon as you recruit someone. You can do this online.
Do you need to keep payroll records?
As an employer, you should always keep payroll records. Even if you don’t need to use pay as you earn.
Independent contractors and freelancers aren’t technically your employees. This means that they will need to take care of their taxes. So, there is no need to subtract taxes from their invoices. Even if they do work for you regularly.
How does PAYE work?
To help with PAYE, HMRC will provide you with a tax code. This will tell you how much tax to deduct from staff wages. To do so, you must collect employee information. You’ll need:
- Date of birth.
- Full address.
- Date of first employment.
You’ll also need information from their P45, including:
- Full name.
- Leaving date of the previous role.
- Total earned and tax paid to date.
- Student loan deduction status.
- NI number.
- Existing tax code.
What happens if you don't have a new employee's 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 to help provide a more accurate tax code.
Once you have a PAYE tax code, you must make sure things such as national insurance contributions are deducted and paid to HMRC. There are several ways you can do this. The method you choose will determine how long the process will take.
For example, if you pay online or via telephone banking, this can be completed immediately. However, direct debit or BACs should do carried out 3-5 days before the deadline.
Does payroll differ for pension schemes?
For the most part, running payroll for a pension scheme is no different to running PAYE for employee wages.
Pensions are treated as income under PAYE meaning retired employees are issued with tax codes. Their tax rate will depend on their income for the tax year from their pension providers and/or state pension. Tax is then deducted accordingly.
The big difference between a payroll for retired employees and an employee payroll is that there is no NIC due on pensions. This is on the assumption that the pension is being paid from a pension scheme.
Your payroll software or PAYE system will generally have the capacity to adapt these parameters, so employees are paid and taxed correctly.
An employee’s details will determine how much you need to deduct from their wages. These adjustments can vary depending on the individual. The forms of deductions that can be made are as follows:
- Employee Income Tax
- Student Loan repayments
You must make payment to HMRC by the 22nd of the next tax month if you pay monthly. If you pay tax quarterly, you must settle the tax 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 NIC procedures apply to expenses and benefits. These include 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. This is done in the same way as the various payment types listed above.
However, more typically, you will report the expenses or benefits you’ve provided to HMRC at the end of the tax year. This is done as a one-off payment of Class 1A NICs on the value of some of them.
You must give each of your employees a wage/pay statement, or payslip. This is given at or before the time of payment.
This can be in either in paper or electronic format, but it must show:
- An employee’s gross pay before deductions.
- All adjustments and their purpose.
- The net amount payable after the adjustments have been made (also known as take-home salary).
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.
How to run payroll
There are different ways to run a PAYE scheme. You may choose to run it yourself or use a payroll provider.
Whatever method you choose you need to follow the correct procedure. Let’s explore the necessary steps you need to know.
Register as an employer with HMRC
You must register as an employer with HM Revenue and Customs when you begin to employ staff. This applies if you are using subcontractors (for construction work for example) or if you're only employing yourself.
Employers can register online using this link.
Collect and maintain records
Recordkeeping is extremely important. When you take on staff you must record their pay, calculate deductions, calculate NICs, produce payslips and report their pay via a Full Payment Submission (FPS).
You must send an Employer Payment Summary (EPS) to HM Revenue and Customs (HMRC) if you’ve not paid any employees in a tax month.
Report everything to the HMRC
Record your employees’ salaries or wages in your payroll software. Include everyone you pay, even if they get less than £123 a week.
Your chosen payroll software will automatically calculate income tax and National Insurance to deduct from your employee’s wage. You may also need to make adjustments for student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments.
Pay National Insurance and tax to HMRC
Any tax and NICs you owe (as well as any other deductions) must be paid to HMRC each month. This is reported in your Full Payment Submission.
There may be reductions available on any Employer Payment Summary (EPS) you send before the 19th of the current tax month.
It’s also important to complete certain annual reports and tasks in preparation for the next tax year.
Running payroll through a PAYE provider
If you choose to use a PAYE provider, such as a bureau or accountant, you’ll still be responsible for collecting and keeping records.
What details need to be recorded?
- Tax codes.
- Taxable income of staff.
- Gross income.
- Pension provider.
- Pay period.
- Additional income.
- Benefits such as company car.
As an employer, you are legally responsible for completing all PAYE tasks. Even if you outsource the task to a PAYE provider.
This includes areas such as a self-assessment tax return and managing your payment system.
Can Croner help with PAYE?
No matter what stage your organisation is at, Croner can help with PAYE. Our award-winning team have been helping UK businesses for over 80 years. Our in-house specialists are on hand 24 hours a day, 365 days a year to resolve employer enquiries.
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