Pay as you earn (PAYE) for employers
The PAYE system administered by HMRC is used by employers to deduct Income Tax and National Insurance Contributions (NIC) from their employees’ remuneration each pay period. These deductions are then sent to HMRC and detailed on each employee’s payslip and end-of-year P60. If you plan to employ people through your business or pay yourself as a limited company director, you will have to register with HMRC as an employer and operate PAYE as part of your payroll, if you or any of your employees:
- Are paid £112 or more per week (£486/month; £5,824/year)
- Receive expenses and benefits
- Have another job
- Receive a pension
Income Tax and NIC should be deducted through PAYE from the following:
- Wages and salaries
- Workplace pensions
- Tips, commission and bonuses
- Holiday pay
- Statutory Sick Pay (SSP)
- Statutory Maternity Pay (SMP)
- Statutory Paternity Pay (SPP)
- Statutory Shared Parental Pay (ShPP)
- Statutory Adoption Pay (SAP)
- Student loan repayments.
You do not have to operate PAYE to pay self-employed workers, but you do have to operate it for temporary or agency workers if you pay them directly, rather than through a third-party.
In addition to deducting Income Tax and NIC, you may also have to deduct student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments.
How to operate PAYE through payroll
You can choose to operate PAYE by paying a payroll provider (a bureau or an accountant) to run payroll on your behalf, or you can do it yourself using payroll software. Either way, you are still legally responsible for completing all PAYE tasks, including collecting and keeping accurate records of your employees’ details and making payments to HMRC.
If you plan to run payroll yourself, you will have to satisfy a number of requirements to set up PAYE and pay yourself (as a company director) or your employees:
1. Register your business with HMRC as an employer
You will have to do this before paying any employees. Registration is carried out online and it can take up to two weeks to process, but you cannot register more than two months in advance of paying anyone. You can choose to register yourself or you can use the services of an accountant or company formation agent. You should receive login details from HMRC for PAYE Online after you have registered as an employer - this will allow you to operate PAYE as part of your payroll.
2. Choose payroll software
You will need payroll software to report to HMRC and carry out the following employer responsibilities:
- Record employees’ details
- Calculate employees’ pay and deductions
- Report payroll information to HMRC
- Work out how much you need to pay HMRC
- Calculate statutory sick pay, maternity pay and paternity pay
If you employ less than 10 people, you can use free payroll software, including HMRC’s Basic PAYE Tool. Otherwise, you will have to use paid-for software that is approved by HMRC. A full list of free and paid-for software is available online from HMRC.
3. Collect and keep records
Record-keeping is extremely important. You will be required to collect and retain records of:
- Employees’ pay and deductions
- Reports and payments made to HMRC
- Employee leave and sickness absences
- Tax code notices
- Employees’ taxable expenses and benefits
- Payroll Giving Scheme documents
All of these records must be kept for at least 3 years from the end of the tax year to which they relate. HMRC may request to check these records, and if you fail to keep full and accurate records, you could be fined up to £3,000.
4. Notify HMRC of new employees
You must gather certain information about each new employee to determine their tax code and starter declaration for your payroll software and to register them with HMRC. The required details are:
- Date of birth
- Full address
- Start date
- Full name
- Leaving date from previous job
- Total pay and tax paid to date for the current tax year
- Student loan deduction status
- National Insurance number
- Existing tax code
You can get most of this information from your new employee’s P45. If they do not have one, they will have to complete HMRC’s starter checklist (which replaced the P46). When you have all of the required details about a new employee, you must report this information to HMRC online using a Full Payment Submission (FPS) on or before the employee’s first payday.
5. Run payroll
Every month, you will have to complete a number of PAYE tasks as part of your payroll. The tax month runs from the 6th day of one month to the 5th day of the next. If you do not pay any of your employees in a tax month, you have to tell HMRC.
To pay your employees through PAYE, you will have to use your payroll software to carry out the following tasks:
- Record their pay. This includes wages and salaries, tips, commission and bonuses, pensions, holiday pay and statutory pay.
- Work out the required deductions from each employee’s pay.
- Work out the amount of employer’s NIC you have to pay on employee earnings above £156/week.
- Provide a payslip for each employee.
- Report your employees’ pay and deductions to HMRC in a Full Payment Submission (FPS) before your employees’ payday. This report should also include payments of £112 or less per week.
6. Pay employee deductions to HMRC
By the 22nd of each month, you must pay HMRC all of the employee deductions you owe: Income Tax, National Insurance Contributions, student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments. You will have reported all of these deductions in the FPS you submitted to HMRC in the previous tax month.
You can pay your PAYE bill in a number of ways, including:
- Direct Debit
- Faster Payments via online or telephone banking
- Online by debit or credit card
- At your bank, building society or the Post Office
- Cheque (deadline for cheque payments by post is 19th of the month, not 22nd)
Note: You may be allowed to pay quarterly if your PAYE bill is normally less than £1,500 per month.
Annual payroll requirements
In addition to your monthly responsibilities as an employer running payroll, you will have to satisfy a number of annual requirements for HMRC at the end of each tax year, which runs from 6th April to 5th April.
Prepare and submit a final Full Payment Submission payroll report of the year.
On or before your employees’ last payday of the tax year.
Update payroll records for all employees who are working for you on 6th April (the start of the new tax year).
From 6th April.
Update payroll software as per your provider’s instructions.
Note: This will ensure your payroll software uses the latest rates and thresholds for Income Tax, NIC and student loan repayments
From 6th April.
Provide a P60 to each employee who is working for you on 5th April - the last day of the tax year.
Note: This form provides a summary of an employee’s totally pay and deductions for the year. Your payroll software may automatically produce P60s. If not, you can order them from HMRC.
By 31st May.
Report employee expenses and benefits, if applicable.
Note: Form P9D or P11D should be used to tell HMRC about these expenses and benefits you have provided. You may also have to complete form P11(b) to report any Class 1A National Insurance due on employees’ expenses or benefits.
By 6th July.
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