Pay As You Earn (PAYE)

Introduction To PAYE

As an employer, you normally have to operate PAYE as a part of your payroll. PAYE is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment.

You’re exempt from PAYE if none of your employees are paid £112 or more a week, gets expenses and benefits, have another job or gets a pension. However, you must keep all payroll records.

Payments & Deductions

When paying your employees through payroll you also need to make deductions for PAYE.

Payments to employees include their salary or wages, as well as things such as tips or bonuses, or statutory sick or maternity pay. From these payments you’ll need to deduct tax and National Insurance for most employees. Other deductions you may need to make include student loan repayments or pension contributions.

Reporting To & Paying HMRC

If you are running payroll you will need to report your employees payments and deductions to HMRC on or before each payday.

Your payroll software will work out how much tax and National Insurance you owe, including employer’s National Insurance contribution on each employee’s earnings about £155 a week.

You’ll be able to view what you owe HMRC, based on your reports. You will then have to pay them, usually every month.

Establishing Payroll

There are a certain number of steps you must take to run the PAYE scheme:

  1. Register as an employer with HM Revenue and Customs and get a login for PAYE online.
  2. Collect and keep records.
  3. Tell HMRC about your employees.
  4. Record pay, make deductions and report to HMRC on or before the first payday.
  5. Pay HMRC the tax and National Insurance you owe.

Keeping Records

You must collect and keep records of:

  • What you pay your employees and the deductions you make
  • Reports and payments you make to HM Revenue and Customs (HMRC)
  • Employee leave and sickness absences
  • Tax code notices
  • Taxable expenses or benefits
  • Payroll giving scheme documents, including the agency contract and employee authorisation forms

Your records must show you’ve reported accurately, and you need to keep them for 3 years from the end of the tax year they relate to. HMRC may check your records to make sure you’re paying the right amount of tax. If you don’t keep full records, HMRC may estimate what you have to pay and charge you a penalty of up to £3,000.