PAYE explained
You need to set up a Pay As You Earn (PAYE) system if you have
employees, or if you are a limited company (as you are counted as
an employee). Make sure you've registered as an employer with HMRC
before you set it up.
What is PAYE?
- PAYE is the system used for deducting tax and National
Insurance Contributions (NICs) from your employees' wages to
pay to HMRC.
- You have to deduct income tax for all employees
earning more than £7,475 a year in tax year 2010/11.
- You have to deduct NICs for all employees aged 16
years or over and under state pension age who earn more than £110 a
week in tax year 2010/11.
- You apply PAYE to all wages, all payments made in
cash (including expenses payments made in cash) and some
benefits in kind (read more about which apply in
HMRC's guide).
Setting up a payroll system
To set up your payroll system (which will calculate PAYE as you
calculate employees' wages), you can use:
- An accountant - this is the easiest option.
- A payroll agency (although remember you are
legally responsible for any mistakes, so you still need to
understand how it works).
- If you do it yourself, you'll need to use one of
the following:
- Payroll software - it must be approved by HMRC
(see Resources for more info on this).
- The Employer CD-ROM you get with your Employer Starter
Pack (see Resources below if you don't have a pack yet) -
this includes a database and calculators for creating and
maintaining payroll records, and will calculate and record tax and
NIC deductions for you.
- A manual wages record (P11 Deductions Working
Sheet) and the tax and the National Insurance tables if you prefer
to do things on paper - although this makes things a lot more
long-winded, harder to calculate and more likely to contain
inaccuracies.
How and when to pay
- You pay HMRC the NICs and tax you've deducted from employees'
pay, according to what you calculated using the calculators
provided by the Employer Pack.
- You make payments monthly to HMRC (although if your payments
are less than £1,500 you can opt to send payments quarterly).
- 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, bank giro, in cash at the Post Office, by BACs or
CHAPS or by cheque.
- Any outstanding payments at the end of the tax year have to be
in to HMRC by April 19.
Forms you need for PAYE
Throughout the year you need to use the following:
- Deductions Working Sheet P11: use this to show the
tax, NI and any student loan deduction owed on an employee's wages
and any type of sstatutory pay (sick, maternity, adoption, etc).
You can also use it as your wages record (see a sample in
Resources, below). You need to start it at the beginning of the tax
year (April 6 - but start a new one when a new employee joins) and
maintain it throughout the tax year.
- P32: keeps a detailed record of total payments and
deductions you make for each pay period (weekly, monthly, etc). You
need it to stick to HMRC's rules and also to help you fill out your
P35 (see below).
- Employee payslip: this isn't a standard HMRC form,
but you need to create one for each employee each time you pay
them. It needs to contain:
- Gross wages (before deductions)
- Details of deductions: income tax, NICs, any student loand
repayments
- Net wages (gross minus deductions - so what they actually
receive)
At the end of the tax year you need to
complete:
- P35: employer's annual return, showing total PAYE
deductions for all employees. (You'll also need a P35 (CS)
continuation Sheet if you employ more than ten people, as there's
only room on the P35 for ten.)
- P14: summary for each individual employee showing
the totals of all payments you made to them throughout the tax year
and the totals of PAYE deductions (transfer the info from all that
year's P11 forms). (If for some reason you're not doing at P14 for
an employer - maybe they're part-time or casual worker - fill out a
P38A.)
- P60: a copy of the P14 you give to the
employee.
- P11D: records expenses and benefits in kind for
employees (you don't need to do this if you have a dispensation).
Read more in our guide on * Calculating non-taxable business
expenses *
- If you have a new employee, you'll also need to
send in the relevant parts of their P45 to HMRC.
You can get all forms from the HMRC Orderline (see Resources,
below). You can also complete them online, and from April 2011 you
will be legally required to do so.
PAYE deadlines at the end of the tax year
- April 19: any outstanding PAYE payments to reach
HMRC.
- May 19: all completed P14 forms and a P35 employer
annual return to reach HMRC.
- May 31: give a completed P60 to each employee by
this date.
- July 6: completed P9D, P11D, P11DX and P11D(b)
forms to reach HMRC. Copies of each of these forms must also be
given to all employees they apply to by this date.
FAQ
How long do I need to keep payroll records
for?
You need to keep records of the three previous tax years (so
you'll have this year's and the three previous years'records).
What if my employee doesn't know their tax code or NI
number?
Call HMRC. They'll be able to point you in the direction. It's not
an uncommon problem, but you do need to find both out as soon as
you employ someone.
Resources
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