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PAYE: The Basics

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PAYE (Pay As You Earn) is the HM Revenue & Customs (HMRC) system for collecting income tax from the pay of employees, including directors, as they earn it.

PAYE (Pay As You Earn) is the HM Revenue & Customs (HMRC) system for collecting income tax from the pay of employees, including directors, as they earn it.

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  • 1. PAYE, the basics Table of contents PAYE: the basics 2 Introduction 2 Employer's responsibility for PAYE 2 Getting started with PAYE 3 When to apply PAYE 4 Employee tax codes 4 PAYE forms - and when to use them 5 Where to get further information on PAYE 6 Here's how I set up a payroll system for my business 6 Helplines 7 Related guides on businesslink.gov.uk 7 Related web sites you might find useful 8 Created by Business Link on 16 September 2009 14:49 You can personalise content from the Business Link website and download it in PDF format. This is a free service PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 1
  • 2. PAYE: the basics Subjects covered in this guide Introduction Introduction PAYE (Pay As You Earn) is the HM Employer's responsibility for PAYE Revenue & Customs (HMRC) system for collecting income tax from the pay of Getting started with PAYE employees, including directors, as they earn it. When to apply PAYE As an employer, you need to deduct income Employee tax codes tax and National Insurance contributions PAYE forms - and when to use them (NICs) from your employees' pay and submit the deductions to HMRC. Where to get further information on PAYE This guide explains how you deduct income Here's how I set up a payroll system for my tax and NICs, outlining the various forms business and processes involved. Helplines Related guides on businesslink.gov.uk Employer's responsibility for PAYE If you employ people, including any directors Related web sites you might find useful of a limited company, you will need to deduct income tax and National Insurance contributions (NICs) from their pay before they receive it. You can find this guide by navigating to: As an employer, you need to know how to Home > Taxes, returns & payroll > PAYE calculate the correct income tax deductions, and payroll for employers > PAYE: the taking account of the various rates, basics allowances and limits that exist. For more information, see our section on your tax bill, payments, deadlines, corrections and refunds. Payments to HMRC By the 19th of each month - or, if you make electronic payments, by the 22nd of each month - you must ensure that the most recent amounts you have deducted from all your employees' pay has reached HM Revenue & Customs (HMRC). If your average monthly payments are likely PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 2
  • 3. PAYE: the basics to be less than £1,500 you may be able to pay them quarterly. Getting started with PAYE When you first start employing people, you If you pay too little or too late, you may incur may find it a challenge dealing with all the interest on these amounts and/or have to forms and procedures involved in organising pay a fine. your payroll. You will learn the parts of the PAYE (Pay As You Earn) system that apply Download the employer further guide to to your particular business situation in PAYE and NICs from the HMRC website stages, as and when they apply to your (PDF, 517K) - Opens in a new window. business. Taxation of benefits-in-kind Setting up a payroll system Employees and directors are also taxed on At first, many employers decide to use an benefits in kind, such as a company car or outside supplier - usually an accountant - to medical insurance. run their payroll for them. An experienced accountant can tell you what systems and As an employer you will have to pay Class forms to use, making sure you don't miss 1A NICs on such benefits. However, you do out any essential steps. See our guide on not have to pay these contributions under how to choose and manage an the PAYE (Pay As You Earn) system - you accountant. do so at the year end. Alternatively you could use a payroll agency, See our section on expenses and benefits but remember you are still legally for employers. responsible for any mistakes. You could invest in a payroll software package, but it must comply with HM Revenue & Customs Filing PAYE returns (HMRC) standards. You can get advice on You can manage your PAYE online using technical specifications of PAYE Online PAYE Online for Employers. Once on the HMRC website - Opens in a new registered, you can complete form P11D window and view a list of accredited using either third-party software or the free payroll software products on the HMRC HMRC Online Return & Forms - PAYE website - Opens in a new window. product. Read about and enrol for PAYE Online for Employers. Actions to get you started • Contact the HMRC New Employer Alternatively, you can download form P11D Helpline on Tel 0845 60 70 143 and from the HMRC website (PDF, 149K) - order a New Employer Starter Pack. Opens in a new window and make a paper The pack includes the Employer return. CD-Rom, which can help you to easily work out tax and National Use our interactive tool to find out about Insurance deductions. You can view the main online transactions you can the contents of the latest New make with government. Employer Starter Pack on the PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 3
  • 4. PAYE: the basics HMRC website - Opens in a new Rates of income tax and National window. Staff on the helpline will also be able to answer any queries Insurance contributions you may have. Note that income tax and National Insurance • Get free confidential advice from contribution rates and thresholds may your local HMRC Advice Team on a change from year to year. See our section one-to-one basis at any location on your tax bill, payments, deadlines, which suits you. Find contact corrections and refunds and our guide on details of your local Advice Team National Insurance: the basics. on the HMRC website - Opens in a new window. Employee tax codes When to apply PAYE Each taxpayer has a personal tax code issued to them by HM Revenue & Customs PAYE (Pay As You Earn) is applied to all (HMRC). You will find this code on a new cash payments an employee receives as a employee's form P45. You use the code result of working for you, including: together with HMRC taxable pay tables to work out how much tax to deduct from your • salary and wages employee. You can look up taxable pay • overtime, shift pay and tips tables on the HMRC website - Opens in a • expense allowances and claims (this new window. only applies where these are paid in cash and, for expense payments, New employee without a P45 only if they fall within specific criteria - for more details, see our guide on If a new employee doesn't have a form P45 expenses and benefits: the basics) and therefore there isn't a tax code for you • bonuses and commission to use, they will probably need to complete a • statutory sick pay form P46. You can do either of the following: • statutory maternity/paternity/adoption pay • Ask the employee to complete the • lump-sum and compensation form themselves. payments - some payments, eg • Complete the form for the employee statutory redundancy payments up to by asking them for the necessary the value of £30,000, are tax exempt information, eg by getting them to fill in a form you created yourself or Taxation of non-cash benefits asking for the information via email. You do not necessarily need the Non-cash benefits, eg childcare provision, employee's signature. company cars and health check-ups, may or may not be subject to PAYE deductions. You can submit the paper version of the form - in which case you will need the Find out about the tax treatment of employee's signature anyway - but it's non-cash benefits on the HM Revenue & quicker and easier to use PAYE Online for Customs (HMRC) website - Opens in a Employers. Read about and enrol for new window. PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 4
  • 5. PAYE: the basics PAYE Online for Employers. • Form P60 - this shows the tax deducted for the whole tax year. You Find details of completing form P46 on must give one to each employee by the HMRC website - Opens in a new the 31 May following the end of the window. relevant tax year. You can order form P60 from the HMRC Employer Orderline on Tel 08457 646 646. PAYE forms - and when to use Download specimen forms P14 and P60 from the HM Revenue & them Customs (HMRC) website (PDF, 79K) - Opens in a new window. You must keep records of wages or salary you have paid to your employees - but also including benefits and expenses. You must If you have 50 or more employees, you must also use these records to give certain send all forms P45 and P46 (including P46 pay-related information to employees. (Pen) and P46 (Expat)) online. And under government proposals all employers, regardless of the number of employees, will There are a number of basic forms and have to send this information online from 6 procedures you need to use to do this. April 2011. Commonly used payroll forms for Payroll administration forms employees If you employ staff you need to keep a There are three main forms to give to your record of all salary payments made, employees, which show what income tax including NICs. You can download a and National Insurance contributions (NICs) specimen form P11 Deductions Working they have paid. Sheet from the HMRC website (PDF, 118K) - Opens in a new window to record These are: these details - this can also be used as the basis of your wages record. • Itemised pay statements - these are internal forms that you create To find out which forms you need to submit and give to your employees to show at the end of the year, see our guide on how how their pay has been calculated - to sort out your PAYE affairs for the end see details of what a pay of the tax year. statement must include on the Department for Business, Read about and enrol for PAYE Online Innovation & Skills (BIS) website - for Employers, or to find out more about Opens in a new window. how electronic filing is being phased in for • Form P45 - new employees who all employers, read our guide on how to file have had a job before will bring this returns online. to you when they start to work for you. In turn, you give them a completed P45 when they leave, You can also get regular reminders of which they pass on to their new important tax dates with our tax deadline employer. email alerts. PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 5
  • 6. PAYE: the basics Where to get further information on Here's how I set up a payroll PAYE system for my business You can order a number of helpful guides Rebecca Alfandary from the HMRC Employer Orderline on Tel 08457 646 646. You can also: Active Designs - Opens in a new window Rebecca's top tips: • download the employer's further guide to PAYE (Pay As You Earn) • "Make use of the HM Revenue & and National Insurance Customs website if you get stuck." contributions (NICs) from the HM • "Get a computerised system as soon Revenue & Customs (HMRC) as you can. It is easier to set up website (PDF, 517K) - Opens in a while you only have a few new window employees." • download a step-by-step guide to • "Ask your accountant what payroll PAYE from the HMRC website (PDF) software they recommend." • download a catalogue of leaflets and booklets from the HMRC Rebecca Alfandary set up her business website (PDF) - Opens in a new Active Designs to supply educational window, which explain the basics of equipment to primary and nursery schools in PAYE and NICs, and include brief 1995. When the company took on its first details of working out how much to employee Rebecca decided to save money deduct from your employees' pay by setting up a manual, in-house payroll system. Now that the business employs five, Alternatively, you can find an employer's it uses a payroll software package instead. information guide in the form of a Here, Rebecca explains how she set up her diary/planner on the HMRC website - first payroll system and why she decided to Opens in a new window. get it computerised. The planner tells you about: What I did • what forms HMRC will be sending to Contact HM Revenue & Customs you during the tax year "Setting up a manual payroll system was • what you have to do at important something I'd worried about and put off for stages in the tax year as long as I could. I thought it would be • contacts, helpline numbers and complicated with a lot of form filling, but locations of tax offices once you know what you're doing, it is quite • HMRC publications for employers straightforward. • forms and information packs you can download from the HMRC website "I contacted HM Revenue & Customs for a New Employer's Starter Pack, which Any HMRC tax office will also be able to contains all the information you need to set give you help and advice. up a payroll system. I also spoke to a couple PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 6
  • 7. PAYE: the basics of HM Revenue & Customs advisers on the advent of online banking, I can transfer the New Employer's Helpline who were very deductions and my employees' wages helpful." directly." Complete the right paperwork What I'd do differently "Many of my first employees were second jobbers, which meant they didn't have a P45 "I wish I'd invested in the payroll software from their previous employer. I had to get sooner. I thought it would be complicated to them to fill out a P46 and send it to HM use, but it's very simple and a great Revenue & Customs. Our payroll just timesaver." involves making the standard PAYE and National Insurance contribution deductions. Read more case studies that describe If there had been other considerations, such first hand how people tackle real-life as student loan repayments, I might have challenges and opportunities. considered outsourcing our payroll to an agency. "When you do a payroll manually you have Helplines to use tables from HM Revenue & Customs HMRC New Employer Helpline to work out how much to deduct. They're daunting at first, but once you know what 0845 60 70 143 pages to use, it's easy. You basically take the employee's gross earnings and cross-reference them against the correct tax HMRC Employer Helpline band. Their personal tax allowance is taken into account automatically." 08457 143 143 Invest in a computerised system HMRC Employer Orderline "When we started to employ more people I asked my accountant about alternatives to 08457 646 646 our manual system and he recommended a well-known payroll software supplier. It cost a couple of hundred pounds plus about £100 a year for the support package. It's Related guides on pretty essential to have that as they send businesslink.gov.uk you updates when any rates of thresholds change, to ensure you're doing your Manage your personal list of starting-up calculations correctly. tasks with our Business start-up organiser | PAYE Online for Employers | Use our interactive tool to help you "Manually, the monthly payroll took a couple comply with the law when taking on staff of hours and I would send the deductions off | File returns online | Use our interactive to HM Revenue & Customs by cheque. tool to find out about the main online Now, it takes me 30 minutes, and with the transactions you can make with PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 7
  • 8. PAYE: the basics government | Your tax bill, payments, deadlines, corrections and refunds | Employer Pack 2009 from HMRC - Opens Operate a year-round PAYE system | Set in a new window yourself up as an employer | National Insurance: the basics | Expenses and Catering and service industry tips and benefits for employers | Avoid common gratuities guidance on the HMRC website PAYE mistakes | Choose and manage an - Opens in a new window accountant | Outsource your payroll | Choosing a payroll system | Expenses Non-cash benefits taxation information and benefits: the basics | Maternity leave from HMRC - Opens in a new window and pay | Adoption leave and pay | Paternity leave and pay | Pay - an overview of obligations | Get regular Taxable pay tables from HMRC - Opens reminders of important tax dates with our in a new window Tax deadline email alerts | Sort out your PAYE affairs for the end of the tax year | Form P46 details from HMRC - Opens in Manage student loans, payroll and other a new window deductions | Business Advice Open Days | Here's how accounting software Wage slips guidance from BIS - Opens in brought efficiency savings to my a new window business | Here's how I used an accountant to help me in my business | Maternity, paternity and adoption pay forms from HMRC - Opens in a new Related web sites you might find window useful In-year forms online filing guidance from PAYE for employers guidance from HMRC - Opens in a new window HMRC - Opens in a new window Advice on choosing a payroll system Online filing benefits information from from HMRC - Opens in a new window HMRC - Opens in a new window PAYE booklets and leaflets from HMRC - Download form P11D from HMRC (PDF, Opens in a new window 149K) - Opens in a new window Download PAYE and National Insurance contributions guidance from the HM Revenue & Customs website (PDF, 517K) - Opens in a new window Free one-to-one advice from your local Advice Team at HMRC - Opens in a new window PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 8