How to pay employees' tax, NICs and student loan repayments

You pay employees' tax, National Insurance contributions (NICs) and any student loan repayments due by setting up a PAYE (Pay As You Earn) system.

Checklist: your responsibilities

  • If you have employees, you have to register as an employer with HMRC:
    • You can do that on the HMRC website.
    • Or by phoning the New Employer Helpline on 0845 60 70 143
  • You need to collect a P45 from each new employee, or fill out a P46 if they don't have a P45.
    • Check items 6 and 7 of part 3 of the P45 agree with part 2, and that the 'Total tax to date' at item 7 is correct.
    • Fill in part 3 and send it back to HMRC. Item 12 of part 3 requires a tax code, which may differ from the one that's shown on the P45 (for example, if their P45 is from an earlier tax year).  Call HMRC to check the code's right.
    • You need to keep part 2 of the P45 for at least three years after the end of the tax year.
    • You can also complete the P45 online on HMRC's website.
  • You are responsible for calculating and deducting tax, NICs and any student loan repayments due from employees on your payroll and paying what's owed to HMRC.
  • You need to set up a PAYE system (read more about how to do that in our guide PAYE explained) to pay employees.
  • You need to provide employees with a pay slip detailing all tax, NIC and student loan deductions and totals.
  • You have to keep payroll records detailing all instances where wages, tax, NICs and any student loan repayments have been paid.
  • At the end of each tax year (April 5) you need to fill out an Employer's Tax Return (P37) and send it to HMRC by May 19. This shows the NICs and income tax you have paid for each employee over the course of the tax year. It should look like this (opens PDF).

Calculating what you pay

  • You pay HMRC the NICs, tax and any student loan repayments you've deducted from employees' pay, as well as your employers' NI.
  • Note: Firms that set up outside London and the South East do not have to pay NI on the first ten employees they recruit during their first year of business. (This measure was introduced in the June 2010 Emergency Budget).
  • You work out what you need to deduct and pay using a PAYE system.
  • Find out more about this in our guide PAYE explained.

Student loans

  • If your employee took a student loan and earns more than £15,000 a year (£1,250 a month, £288.46 a week), you need to make student loan deduction on their behalf.
  • Find out more about how to do this using HMRC's guidance.
  • You deduct student loan repayments as part of your PAYE system.

National insurance

It's worth explaining National Insurance payments in a bit more detail here, so you can understand what's going on when you come to work them out:

  • Note: Firms that set up outside London and the South East do not have to pay NI on the first ten employees they recruit during their first year of business. (This measure was introduced in the June 2010 Emergency Budget).
  • You pay Class 1 primary NICs (employees' contributions) to HMRC on behalf of each employee earning above the earnings threshold (£110 per week for tax year 2010/11).
  • They come in at 11% of the employee's earnings for the month, for each employee earning between £97 and £844 per week (tax year 2010/11), and an additional 1% on top of that for employees earning more than £844.
  • You also pay Class 1 secondary NICs (employers' contributions) to HMRC for each employee above the earnings threshold (£110 per week for tax year 2010/11).
  • For each employee earning more than £110 per week, these are 12.8% of their earnings in the month.
  • Here's an up-to-date table of the various thresholds and NICs for each tax year.
  • You take off NICs as part of your PAYE system.

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Tax

  • Tax varies according to the situation of the employee.
  • You need to know their tax code to work it out.
  • You then work out the tax they owe using this through your PAYE system.

When and how you pay

  • You make payments monthly to HMRC (although if your payments are less than £1,500 you can opt to send payments quarterly), using your PAYE system.
  • If you pay electronically, you have to pay by the 22nd of the month. If not electronically, it has to be by the 19th.
  • Providing you have less than 250 employees, you can pay online, by direct debit or by cheque.

 

FAQ

What happens about sick pay?
If an employee is off sick for more than four days in a row, you might have to pay them Statutory Sick Pay (SSP). Find out more in this guide from HMRC.

Resources

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