PAYE Explained

If you have employees or are a limited company (you are counted as an employee,) you will need to set up a Pay As You Earn (PAYE) system or work with a PAYE payment company. Before all this you need to ensure you are registered with HMRC as an employer.

PAYE?

This is a system used for deducting Tax and National Insurance from your employees’ wages in order the pay HMRC; this goes that you must deduct tax for all employees that earn more than 7,475 a year per tax year – for example April 2010, to April 2011.

National Insurance must be deducted for all employees that are aged over 16, but under state pension age, but only if they are earning more than £110 a week in a tax year. PAYE must be applied to all wages, and payments, even if they are made in cash for expenses – including some benefits. To understand more consult the HMRC’s guide.

Payroll System?
There are many ways of setting up a payroll system, which will calculate the amount of tax and insurance needing to be deducted at the same time as calculating your employees’ wages. One way is using an accountant; which is one of the easiest options. Use a payroll agency, although you are responsible for any mistakes so it is always valuable to understand the system yourself.

However if you do it yourself, you need to ensure you have approved software from the HMRC; though when you become an employer, you will receive an Employer Starter Pack and this will come with a CD-ROM which will get you started with a database and calculators for creating and keeping track of your payroll records – including tax and insurance contributions. Or you could use a manual wages record, the P11 Deduction sheet, if you prefer to do things on paper – although this can be harder and more likely to contain errors.

Paying the HMRC?

You must pay the Tax and NIC you’ve deducted from the employees’ pay on a monthly basis, although if your payments are less than £1,500 a month you can pay quarterly. Though if you pay electronically you must make the payment by the 22nd of every month, and not electronically needs to be by the 19th of each month. If you have less than 250 employees you can pay a variety of ways; online, direct debit, bank giro, or in cash at the post office. Or use BACs, CHAPS or by cheque. Any owing payments at the end of the tax year must be received by the HMRC by April 19th.

Forms?

During the year you must use:

· Deductions working sheet P11; to show tax, NIC, student loan owing and any statutory pay such as sick pay, maternity pay etc.
· P32; detailed record of payments and deductions for each pay period eg monthly, weekly.
· Payslips; must give one to each employee, containing – gross wages, deductions and their net wage after deductions.

Come the end of the tax year you must complete the following;

· P35; an annual return showing all PAYE reductions, but it will only hold 10 employees, so you may need to continuation sheet too.
· P14; a summary for individual employees’ showing all deductions throughout the year – for part time and casual staff use a P38A
· P60; the copy of a P14 to give to employee.
· P11D; a records expenses form, and benefits in kind for employees however if you have a dispensation you don’t need to do this.
· New employees, you need to send in the relevant part of their P45 to HMRC.

All forms can be gained from the HMRC Orderline.

PAYE Deadlines

· April 19th, any payments outstanding to reach the HMRC.
· May 19th all completed forms P14, and 35 forms to reach the HMRC.
· May 31st, all employees’ should have their P60’s.
· July 6th, complete P9D, P11D, P11DX and P11D(b) forms to arrive at the HMRC – copies must also be given to employees’ by this point.

FAQ’s

Payroll records need to kept for the three previous tax years; so you will have the current year and the three previous years in your possession.
If your employee doesn’t know their tax code of NI number, call the HMRC and they will be able to help you discover them – but you need them as soon as you employ someone.

Any questions call the HMRC they will be able to help you with forms and any queries you may have.

Category: Uncategorized