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PAYE – some frequently asked questions

PAYE stands for ‘pay as you earn’. It is a system administrated by HM Revenue and Customs (HMRC) that enables employees to pay their National Insurance contributions, sometimes known as NICs, and income tax through their wages. Employers subtract the required amounts from wages, or from occupational pensions, and pay these directly to HMRC before the individual receives what is left. The individual’s wage slip will show exactly what deductions have been made. The system is convenient because it enables people to pay their tax over the course of each year rather than having to find a large lump sum at the end of the year.

What are the PAYE responsibilities of an employer?

Employers have to send PAYE returns to HMRC electronically each time they pay their staff. This is done as part of a regular payroll system and involves completing and submitting what is known as a Full Payment Submission (FPS) just before or on paydays. In order to carry out this task, employers can either use HMRC’s own Basic PAYE Tools or commercial software designed for payrolls.

PAYE is paid either monthly or quarterly and only if an employee has earnings which are above the Lower Earnings Limit (LEL), which was set at £473 a month for the 2013-14 tax year. An individual’s NICs category and tax code are used to work out the correct amount.

How do employers set up PAYE?

Before employing anyone, employers should check with HMRC to see if a PAYE system will be required. Most will probably find that they need to register with HMRC for PAYE and this should be done well in advance of an employee’s first payday. Registration is often carried out online, following a simple step-by-step procedure, and a Government Gateway account, with a user ID and password, is needed. The process requires an Activation Code, which is received by post, and which is used to activate the online PAYE service for the first time. Certain employers, such as some limited companies, may need to register by emailing, phoning or writing to an HMRC Office.

What records must be kept for PAYE?

Records that show all of the payments made to employees must be kept for PAYE. These can be created using payroll software that is commercially available, or the Basic PAYE Tools offered by HMRC. Certain forms will need to be completed at the beginning of each tax year and also at the end. A P60 form should be given to every employee with earnings greater than the LEL when each tax year ends.

What help is available for those who need more information about PAYE?

For those just starting to set up in business, HMRC provides many different types of help for employers, ranging from e-learning options to webinars, videos and regular advice emails. These aids will cover what employers need to know about PAYE. In addition, employers can make specific enquiries online by filling in a form on the HMRC website, or by phoning the HMRC helpline. Some people might prefer to employ an accountant to handle their PAYE and a suitably qualified professional should be able to answer any questions they might have.

Posted by Mark
October 3, 2013

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