PAYE (Pay As You Earn) is a system used by employers in the UK to deduct income tax and National Insurance contributions from employee’s salaries or wages. PAYE ensures that employee’s taxes are paid regularly and accurately throughout the year when employers calculate and deduct an amount of tax and National Insurance contributions from the employee’s pay and then report and pay these deductions to HM Revenue & Customs.
Setting up PAYE and Running Payroll
To set up PAYE in the UK, you must first register as an employee with HM Revenue & Customs (HMRC) on the HMRC website. Then it is necessary for you to obtain information about your employees, including their National Insurance numbers, tax codes and other relevant details. Then a payroll system should be chosen so that you can outsource your payroll to a third party provider. Afterwards, income tax and National Insurance contributions should be calculated and deducted from employee’s pay every pay period. You will then need to report payroll information to HMRC by submitting Real Time Information (RTI) reports to HMRC every time you pay your employees. It is required for you to pay the deductions from your employee’s pay to HMRC by the deadlines provided. When running payroll, it’s important to also submit payroll information to HMRC on or before the payday and pay the accurate PAYE deductions to HMRC, providing payslips to the employees.
How to calculate PAYE deductions
To calculate PAYE deductions you must first determine the employee’s gross pay which is the total amount of money the employee earns before any deductions. Then the employee’s tax code must be applied – this tax code provided by HMRC companies determines how much tax-free income an employee is entitled to. The tax code can be found on the employee’s P45 or P60 form. Subsequently, the employee’s taxable pay must be calculated with any tax-free allowances from the employee’s gross pay to be subtracted to determine the taxable pay. After referring to the current income tax rates and thresholds set by HMRC, you can calculate the amount of income tax to be deducted from the employee’s taxable pay. Based on their earnings and the applicable rates your employee’s National Insurance contributions can be calculated and deducted. If there are any other deductions such as pension contributions or student loan repayments, then subtract these from the employee’s net pay to finally finish calculating PAYE deductions.
Reporting to HMRC
To report PAYE to HMRC, you must be able to use payroll software or HMRC’s online services to submit RTI reports to HMRC on or before each payday. This includes deductions for tax and National Insurance as well as other relevant information like details of payments made to employees. Ensure that you have registered as an employer with HMRC and have obtained the necessary information from your employees. Every time an employee is paid, submit a Full Payment Submission (FPS), even if you are not paying them in a particular pay period. If you need to report any adjustments to your PAYE scheme, such as statutory payments or CIS deductions suffered, then submit an Employer Payment Summary (EPS). Be aware and keep accurate records of your payroll information, including payslips, P60s and P11S, as HMRC could request them for verification.
PAYE for Different Types of Employees
The application of PAYE can vary depending on the type of employee. Full-time employees – employees who work regular hours for an employer – are subject to PAYE deductions based on their salary or wages. Their tax code and National Insurance contributions are calculated based on their earnings and tax status. Part-time employees who work fewer hours than full-time employees are also subject to PAYE deductions based on their earnings but their tax code and National Insurance contributions are calculated in proportion to their working hours. Temporary employees, such as seasonal workers or contractors, are also subject to PAYE deductions based on their earnings. However, their tax code and National Insurance contributions are based on the duration and nature of their employment. Freelancers and self-employed individuals are responsible for calculating their own income tax and National Insurance contributions through the Self-Assessment system instead of PAYE.
End-of-Year Payroll Processes
The end-of-year payroll processes in the UK involve a few key tasks. These include issuing P60 forms which employers should provide to all employees by the end of the tax year. The P60 summarizes the total earnings and deductions for the year. Employers must also submit P11D forms to HMRC following the end of the tax year to report any taxable benefits provided to employees. Employers must ensure that all payroll records are up to date and are accurate, including any changes in employee details, tax codes or benefits. Employers should also reconcile their payroll records to make sure that payments and deductions are correctly accounted for through the tax year. A final FPS must be submitted for the tax year to HMRC, with the details of the total earnings and deductions for each employee. If applicable, employers need to finalize any PAYE Settlement Agreements (PSA) with HMRC for any taxable benefits provided to employees.
Common PAYE and Payroll Mistakes
Some of the common mistakes that are made include incorrect employee information which can lead to errors in tax calculations and reporting. Failing to submit payroll information to HMRC on time has resulted in penalties and fines. Incorrect tax codes for employees can be used and can lead to under or overpayment of taxes. The failure to account for overtime and bonuses can also result in incorrect tax calculations. Often, employees can be misclassified as self-employed or vice versa which leads to compliance issues and possible penalties. Falling to maintain accurate payroll records can make it difficult to rectify errors and comply with HMRC requirements. With changes in tax laws and regulations, not staying up to date can result in non-compliance and financial consequences.
Staying compliant with Payroll Regulations
To stay compliant with payroll regulations it is essential to keep an accurate record of employee wages, deductions and payments and remember to include overtime, bonuses and benefits. Providing employees with payslips detailing their earnings, deductions and tax contributions also contributes to staying compliant with regulations as well as staying up to date with changes in payroll legislation and regulations such as minimum wage rates, statutory sick pay and maternity pay. When conducting regular audits of your payroll processes, ensure accuracy and compliance with regulations.
How can we help?
At BVS Accounting we’re able to provide you with many services regarding PAYE and payroll for employers. These services include Payroll Data Entry, Tax calculations, National Insurance, PAYE, Auto Enrolment, Pensions, RTI provided to HMRC, Payslips, Official documents like P45, P60 and P11d, other reports, end-of-year summaries and GDPR compliance. Our clients will be able to receive real-time details also with their own personal log-in so they are assured as we do what we can best.
We hope this was an informative article based on PAYE and payroll for employees for you.
