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Learning to PAYE the right way

If you run a UK business and have permanent or contracted employees, you will need to both understand and conform with the Pay As You Earn (PAYE) tax system.

The system is used by Her Majesty’s Revenue and Customs (HMRC) to collect National Insurance (NI) premiums and Income Tax from those who work in the UK. Both NI and Income Tax are payable on the wages you pay, tips, bonuses, maternity pay, and statutory sick pay.

In the UK, the employer is responsible for deducting the required tax and National Insurance payments from the wages they provide. They are also responsible for deducting pension contributions and student loan repayments, where applicable.

On or before each payday, firms have to report the amount each employee has earned, along with all deductions, to HMRC. The deductions made are paid to HMRC each month under the FPS (Full Payment System). Small businesses that expect to collect less than £1,500 a month can apply to make payments to HMRC on a quarterly basis. If an employee is going on holiday, declaration and payments can be made in advance.

The latest PAYE system allows the Government to collect taxes in real time. This means that the old P14, P46, P35 and P45 forms are for employee information only, and are no longer required by HMRC.

Every firm has to stay abreast of any changes in the law and apply them in full. Failure to apply the rules correctly, to collect the right amount of tax, or to pay the tax collected on time can all result in penalties and unwanted attention from the tax authorities. It can also lead to your employees owing the tax authorities money.

Given the complexities of PAYE, many firms employ an accountant to take care of this aspect of their business. Those that do not must buy complex payroll software and employ staff to take care of all aspects of paying employees. Naturally, these personnel need to be fully trained, and that training needs to be kept up to date.

Posted by Peter
January 11, 2015

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