Pay As You Earn
PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NICs) from employees' pay as they earn it. The term 'employee' on this page includes directors of limited companies.
As an employer, you'll have to deduct tax and NICs from your employees' pay each pay period and pay Employer's Class 1 NICs if they earn above a certain threshold. You pay these amounts to HMRC monthly or quartely. If you don't send the correct amount, or if you send it in late, you may have to pay interest. After the end of the tax year you must send HMRC an Employer Annual Return (form P35 and forms P14). Almost all employers are required to file this online.
Employers' Responsibility for PAYE
As an employer you have a legal obligation to operate PAYE on the payments you make to your employees if their earnings reach the National Insurance Lower Earnings Limit (LEL). For the tax year 2012-13 this is £107 a week, £464 a month or £5,564 a year.
You use the employee's tax code and National Insurance category letter to work out how much Income Tax and NICs to deduct from their pay and gow much Employer's Class 1 NICs you owe on their earnings. By the 19th of each month - or by the 22nd if you make electronic payments - HMRC must have received the amounts owed. You may be able to send the amounts due every quarter if your average monthly payments are likely to be less than £1,500.
What Payments does PAYE Apply to?
PAYE is applied to all the payments that an employee receives as a result of working for you, including:
Ø Salary and wages
Ø Overtime, shift pay and tips - unless these are paid directly to your employee or they come out
of an independent tronc
Ø Bonuses and commission
Ø Certain expenses allowances paid in cash
Ø Statutory sick pay
Ø Statutory maternity, paternity or adoption pay
Ø Lump sum and compensation payments - like redundancy
payments - unless they're exempt
Ø Non-cash items like vouchers, shares or premium bonds - you
apply PAYE to the cash value of items like this
PAYE on Expenses and Benefits
Different tax and NICs procedures apply to expenses and benefits - such as comapny cars or medical insurance - that you provide to your employees. In certain cases you'll have to operate PAYE on the value of an expense or benefit in the same way as for the various payment types listed above. But more typically you'll need to report the expenses and benefits you've provided to HMRC at the end of the tax year and make a one-off payment of Class 1A NICs on the value of some of them.
Other Deductions under PAYE
As well as deducting Income Tax and NICs from your employees' pay each pay period, you might also use the PAYE system to deduct other items such as:
Ø Student loan repayments
Ø Employees' pension contributions
Ø Payments under an attachment of earnings order
Ø Repayment of a loan you've made to an employee
You'll have to give each of your employees a pay statement - or payslip - at or before the time that you pay them. This can be in either paper or electronic format but it must show certain items, including each empolyee's gross pay (before any deductions are made), all deductions and the purposes for which they are made, and the net amount payable after the deductions have been made (also known as take home pay). 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. You must do this for each employee who was working for you at 5 April whose earnings reached the National Insurance Lower Earnings during the tax year. This must be in paper format and must be given to the employee before 1 June following the end of the tax year.
Your Employer Annual Return (P35 and P14s)
After the end of the tax year - and by no later than 19 May - you must send HMRC an Employer Annual Return (P35 and P14s) summarising your payroll figures for the year. Almost all employers are required to file this return online.
PAYE Forms and Deadlines at a Glance
When you operate PAYE you'll use certain key forms and procedures to keep a record of all payments you make to your employees. Some forms give you the information you'll need to operate PAYE correctly and you'll use others to tell HMRC about your employees and their pay details.
Ø Form P45 - New employees who've had a previous job, or have had a period on state benefits,
will give you a P45 when they start. When they leave you
give them a completed P45 for their new employer.
Ø Form P46 - Your employee will usually need to complete a
form P46 or supply the information for you to complete if they
don't have a P45. Part 1 gives your employee's personal
details, including their National Insurance number,
current/recent work history and any student loan details.
Part 2 gives details about your PAYE scheme and the tax code you're using for them.
Ø Form P60 - You'll need to issue a form P60 to each employee who was working for you at 5
April whose earnings reached the National Insurance Lower Earnings Limit during the tax year.
The P60 shows the employee's pay and tax for the whole year. This can be in either paper or
electronic format and must be given to the employee before 1 June following the end of the tax
Start of Tax Year Forms
Ø Forms P9(T), P9X - These tell you about the tax codes to use for your employees for the
following tax year - from 6 April. For some employees you might get an individual from P9(T),
showing their new tax code based on their individual circumstances. For your other employees,
form P9X will tell you how to work out their newcodes, based on any changes that the previous
Budget has made to tax rates or allowances.
Ø Form P7X - This form tells you about any more changes that you'll need to make to your
employees' tax codes as a result of the Budget. These changes usually apply from May.
Once you've registered with the 'PAYE Online for employers' service, HMRC will start to send you these tax code notices online rather than by post. You'll need to log on and check for new notices, or else provide the service with an email address so that you can be alerted each time a new notice is sent to you.
Payroll Administartion Forms
Ø Form P11 - Deductions Working Sheet - You use a form P11 (or an equivalent record) for each
employee to keep details of their pay and deductions
throughout the year. Although the P11 is available in paper
format, you will save yourself time and effort by using payroll
Ø Form P14 - At the end of each tax year you must complete
form P14 for each employee whose earnings reached the
National Insurance Lower Earnings Limit. This is a summary of
the information you've recorded throughout the year on each P11. Your P14s must reach HMRC
no later than 19 May and almost all employers are required to file them online.
Ø Form P35 - You list details of all your employees on form P35 and the amount of Income Tax
and NICs you've deducted from each of them. Your P35 must reach HMRC no later than 19 May
and almost all employers are required to file it online.
Expenses and Benefits Forms
Ø Form P9D,Form P11D or Form P11D(b) - You use these forms to tell HMRC about expenses
and benefits you've provided to your employees. Use form P11D for company directors and
employees who earn at a rate of £8,500 a year or more and form P9D for employees who earn
less than that. Use form P11D(b) to report the total amount of Class 1A NICs due on the
benefits that have been recorded on all your P11Ds. You must ensure all these forms reach
HMRC by 6 July.
Ø Form P11D(X) - You can use this form to apply for a dispensation to cover certain expenses
and benefits you provide to your employees. If HMRC agrees to cover an item in a dispensation,
you won't have to report it on forms P11D or P9D.
Ø Form P46 (Car) - You use this form to tell HMRC if you give an employee the use of a company