The basics of PAYE

 

When you need to register as an employer

You don't necessarily need to register as an employer once you take someone on. Check first that at least one of the following conditions applies to you. If any apply, then you need to register:

  • you're paying them at or above the PAYE threshold;
  • you're paying them at or above the National Insurance Lower Earnings Limit;
  • the employee already has another job (this applies even if both jobs are below the Lower Earnings Limit);
  • they are receiving a state or occupational pension; or
  • you're providing them with employee benefits.

The National Insurance Lower Earnings Limit for 2018-19 is £116 per week or £6,032 per year.

Bear in mind that you might need to register as an employer even if you're the only person working in your business. If you run a one-person limited company, you'll be both an employer and an employee. So if any of the conditions above apply to you as an employee you'll need to register.

Deducting tax and National Insurance Contributions (NICs)

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 quarterly. If you don't send the correct amount, or if you send it in late, you may have to pay interest.

PAYE on expenses and benefits

Different tax and NICs procedures apply to expenses and benefits, such as company 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 other income. But more typically you'll need to report the expenses or 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.

Real Time Information (RTI)

Employers have to report PAYE information to HMRC in real time. This means that employers (or their agent) have to:

  • send details to HMRC every time they pay an employee, at the time they pay them; and
  • use payroll software to send this information electronically as part of their routine payroll process.

What you must give your employees

You'll have to give each of your employees a 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 employee'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).

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 Limit 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.

Starting and leaving forms

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.

New starter form - All new employees should complete a starter declaration to provide their personal details, including their National Insurance number, current/recent work history and any student loan details.

Understanding employee tax codes

An employee's tax code is usually made up of one or more numbers followed by a letter. If you replace the letter with '9' this tells you the amount of pay an employee can earn from you in a tax year before they pay any tax. Never alter an employee's tax code unless HMRC tells you to.

Further guidance

Further information about PAYE, National Insurance Contributions and how to register as an employer can be found on the HMRC website:

> HMRC - PAYE

 

Disclaimer

This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.

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