If you have decided to take the step of employing a member of staff, or you have decided that as a Director of the company, you would like to be a salaried, employed member of staff, then PAYE is something you will need to learn about.This is our guide to PAYE in the UK and what you need to know as an employer.
Introduction to PAYE
As an employer, you normally have to operate PAYE as part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.You do not need to register for PAYE if:- None of your employees are paid £120 or more a week,- They receive no expenses or benefits- They have another job or get a pension.However, you must keep accurate payroll records.
What is PAYE?
The Pay As You Earn (PAYE) system is a method of paying income tax and national insurance contributions. As an employer, you deduct tax and national insurance contributions from employees’ wages or occupational pension before paying them their wages or pension.
Payments and deductions
When paying your employees through payroll you also need to make deductions for PAYE.As soon as you start employing people the questions come to mind:How often do I have to pay employees?On what day of the week/month do I pay my employees?This is what we can say about it.It is your company and it is your decision how often and when. Before you decide let us share with you some ideas:Before you can pay your employees the payroll calculations should be run (see below for some details about the calculations).
There are some historically formed habits in certain industries. For example, the hospitality industry usually pays weekly, office-based jobs might have a payment pattern such as “last Friday of every month is a payday”. But as we said it's all bespoke to your company.We are of the opinion that it has to be simple for you as the employer and for the employee, easy to explain and easy to understand. And also have actual information.
Based on that we recommend the following:
Payroll month should be from 1st day of the month to the last day of the month. It's easy to remember and understand. If you hire someone mid-month, you can calculate the prorated amount until the end of the month and then from the 1st day of the following month start fresh.The payment day should be the 5th day of the following month. In such a case, there will be no estimates or last-minute changes regarding holidays or unexpected sick days. 5 days are usually enough to collect all the data and process it.If your team gets paid based on the hours worked, use the technology to track that time. There are a few providers on the market who provide applications which can help you do that. The features to look for: clock in and out of the shift (start and finish shift), leave requests, IP address recorded (so no attempts or employees to pretend that they are at work when they are running late), face recognition (so it's the right person check-in and out). If you are confused with the variety please reach out to us and we can talk you through.
Payments to your employees
Payments to your employees include their salary or wages, as well as things like any tips or bonuses, or statutory sick or maternity pay.
Deductions
During the payroll preparation calculations need to be made on how much tax and National Insurance to deduct from your employees’ pay. You may also need to deduct student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments.How much Income Tax you pay in each tax year depends on:how much of your income is above your Personal Allowancehow much of your income falls within each tax bandIncome Tax - Current rates and allowances
The current tax year is from 6 April 2020 to 5 April 2021.The standard Personal Allowance is £12,500, which is the amount of income you do not have to pay Income Tax rates and bands.The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £12,500. You do not get a Personal Allowance on taxable income over £125,000.
Band Taxable income Tax ratePersonal Allowance Up to £12,500 0%Basic rate £12,501 to £50,000 20%Higher rate £50,001 to £150,000 40%Additional rate over £150,000 45%
National Insurance rates and categories
An employee’s Class 1 National Insurance is made up of contributions:deducted from their pay (employee’s National Insurance)paid by their employer (employer’s National Insurance)Employers use an employee’s National Insurance category letter when they run payroll to work out how much they both need to contribute. Most employees have category letter A where the following rates apply:
Employee National Insurance
Category letter £120 to £183 (£520 to £792 a month) £183.01 to £962 (£792.01 to £4,167 a month) Over £962 a week (£4,167 a month)A 0% 12% 2%
Employer National Insurance
Category letter £120 to £169 (£520 to £732 a month) £169.01 to £962 (732.01 to £4,167 a month) Over £962 a week (£4,167 a month)A 0% 13.8% 13.8%
Reporting PAYE to HMRC
If you run payroll yourself, you’ll need to report your employees’ payments and deductions to HMRC on or before each payday.Using payroll software, such as Xero, then this software will work out how much tax and National Insurance you owe, including an employer’s National Insurance contribution on each employee’s earnings above £169 a week.You’ll need to send another report to claim any reduction on what you owe HMRC, for example for statutory pay.
Paying HMRC
You’ll be able to view what you owe HMRC, based on your reports. You then have to pay them, usually every month.However, if you’re a small employer that expects to pay less than £1,500 a month, you can arrange to pay quarterly - contact HMRC’s payment enquiry helpline.
Employers' liability insurance
You should ensure you have in place employers’ Liability (EL) insurance when you become an employer - your policy must cover you for at least £5 million and come from an authorised insurer.EL insurance will help you pay compensation if an employee is injured or becomes ill because of the work they do for you.If you do not want to undertake the task of PAYE yourself please do get in touch. We are experts in PAYE and are more than happy to help.
