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 treated as an employee).
What is PAYE?
- PAYE is the system used for deducting tax and Class 1 National Insurance Contributions (NICs) from your employees' wages to pay to HMRC.
- You deduct income tax for all employees earning more than £7,475 a year in tax year 2010/11.
- You deduct Class 1 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.
Setting up a payroll system
To set up your payroll system (which calculates PAYE), you can use:
- An accountant.
- A payroll agency (you are still legally responsible for any mistakes if you use an agency).
- Payroll software.
- The Employer CD-ROM you get with your Employer Starter Pack.
- A manual wages record (P11 Deductions Working Sheet) and the tax and the National Insurance tables if you prefer to do things on paper. This is more complicated.
How and when to pay
- You make payments monthly to HMRC (if your payments are less than £1,500 you can send payments quarterly).
- If you pay electronically, you have to pay by the 22nd of the month. If not electronically, 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
You can complete all forms online - from April 2011 you will be legally required to do so.
- Deductions Working Sheet P11: shows the tax, NI and any student loan deduction owed on an employee's wages and any type of statutory pay (sick, maternity, etc). You can also use it as your wages record. Maintain throughout the tax year.
- P32: a detailed record of total payments and deductions you make for each pay period (weekly, monthly, etc).
- Employee payslip: not an HMRC form, but you need to create one for each employee each time you pay them. It details gross wages, details of deductions (income tax, NICs, student loan repayments), net wages (gross minus deductions - what they receive).
At the end of the tax year you need to complete:
- P35: employer's annual return, showing total PAYE deductions for all employees.
- P14: summary for each individual employee showing the totals of all payments and deduction for them throughout the tax year (transfer the info from all that year's P11 forms). (Use a P38A for part-time or casual workers.)
- 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).
You can get all forms from the HMRC Orderline (see Resources, below).
You need to keep records of the three previous tax years.
PAYE deadlines
- April 19: outstanding PAYE payments to reach HMRC.
- May 19: completed P14 and P35 to reach HMRC.
- May 31: give 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.