If your small business employs people then it’s likely you’ll need to register under PAYE so they can pay tax to HMRC.
What is PAYE?
PAYE is HMRC’s automatic system for collecting income tax and National Insurance payments from people employed by companies across the UK.
When you make a salary payment to your employee, it’ll include tax deductions which are paid to HMRC via PAYE.
What does PAYE mean?
PAYE stands for ‘Pay As You Earn’ and has been around since the 1940s.
As an employer using PAYE, you pay your employee’s tax contributions to HMRC directly from their salary. This means when an employee receives their salary, all their deductions for tax and payments like student loan repayments have already been made automatically.
What is PAYE tax?
Employers collect PAYE tax from employees wages and pay it to HMRC on a weekly or monthly basis. The PAYE tax year runs from 6 April to 5 April the following year, which is when you’ll need to complete your end-of-year PAYE return.
Every employee will have a tax code given to them by HMRC. This allows businesses using PAYE to know how much to deduct from wages.
At the start of each tax year, HMRC will send out details of every employee’s tax code. This is known as a PAYE notice of coding.
Tax codes can change – for example, when an employee gets a pay rise or stops receiving a taxable benefit such as private healthcare.
When this happens, HMRC will let you know. It’s important that you update the employee’s payroll information as soon as possible so they aren’t overpaying or underpaying tax.
PAYE tax forms
There are also a number of HMRC PAYE tax forms that you may need to give to employees. These include:
- P45 – if an employee leaves your company
- P60 – a tax and earnings summary given to all employees at the end of the tax year
- P11d – if you have benefits like company cars or health schemes
How is PAYE calculated?
PAYE income tax is calculated based on how much your employee earns above the personal allowance (which is £12,570 for the 2021-22 tax year).
Here’s a breakdown of the three tax bands:
- if the employee earns up to £12,570, they won’t need to pay any PAYE income tax
- employees earning between £12,571 and £50,270 will be charged the 20 per cent basic tax rate
- employees earning between £50,271 and £150,000 will be charged the 40 per cent higher tax rate
- employees earning more than £150,000 will be charged the 45 per cent additional tax rate
To get an accurate result, you’ll need your employee’s tax code and the period of pay, as well as gross pay and tax totals.
You can also use HMRC’s basic PAYE tools to help you manage your payroll.
Can you operate PAYE yourself?
If you want to run your own payroll, you’ll need to register as an employer with HMRC and make sure you have an ERN number (also known as a PAYE reference number) for all your employees.
Operating payroll yourself is the cheapest option, but it can be time-consuming if you don’t have experience of the PAYE system.
There are a range of rules you’ll need to follow, such as keeping three years worth of records on all employees and paying HMRC the correct amount of tax.
If HMRC asks to check your records and they aren’t comprehensive enough, they could estimate what you need to pay them (which could cost you more) and fine you up to £3,000.
Paying for someone to operate your payroll
You can complete Payroll yourself, however it would be less time consuming to pay an accountant to do it for you. We provide Payroll services from £10 per month, and you can view our package here.
If you go decide to complete Payroll yourself, you’ll still need to keep records on your employees and share them with your accountant.
About Parker Whitwood
We are experienced, AAT qualified Accountants in Manchester, with over 80 years of collective experience. Our wonderful team are always on hand to deliver a consistent and high-quality service.
Our practical and friendly approach will provide you with the information you need to make the right financial decisions for your business. If you’re looking for experienced accountants and bookkeepers in the Manchester area, then look no further.