PAYE

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The basics of PAYE

If you’re planning on employing someone, or if you are going to become an employee of your own limited company, you’ll need to get to grips with PAYE.

What is PAYE?

Pay As You Earn (PAYE) is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions from employees pay as they earn it. This only applies if they earn above a certain threshold.

A step-by-step guide to PAYE

  • Register as an employer with HMRC.
  • You’ll get a new employer registration letter, containing an Accounts Office reference and a PAYE (Pay As You Earn) reference.
  • You’ll also get a ’New Employer - getting started’ guide.
  • Choose your payroll software or a company that can run your payroll for you - visit HMRC for a recognised list of software providers
  • After you have run your weekly or monthly payroll you must pay the employee’s tax and NICs to HMRC, by the 22nd of each month for electronic payments. You also have to pay employer NICs to HMRC. If your payments are late you will be charged penalties and interest.
  • To work out how much you need to pay, you need to get your employee’s tax code. 
  • You will also need to inform HMRC in real time every time you pay your employees. This is known as RTI and came into force in April 2013.
  • After the end of the tax year (and by no later than 19 May), you will need to send HMRC your Employer Annual Return. This summarises your payroll figures for the year.

The list of requirements may seem daunting, but good payroll software will make it easier to manage.

How PAYE affects payslips

Every time you pay your employee you must give them a payslip (or pay statement). This should record the following:

  • gross pay, before deduction of tax or National Insurance contributions (NICs)
  • employee’s Class 1 NICs deducted
  • tax deducted
  • net pay, after deductions have been made

At the end of the tax year, you must give them a record of their pay and deductions on the P60 form.

Want to know more about payroll?

To find out more about how to run a payroll system, read our article here.

You can also visit the payroll section of the HMRC website for a full guide.