PAYE
PAYE (Pay As You Earn) is the HM Revenue & Customs (HMRC) system for collecting income tax and National Insurance contributions (NICs) from employees as they earn it.
Employer's responsibility for PAYE
If you employ people, including any directors of a limited company, you will need to deduct income tax and NICs from their pay before they receive it.
As an employer, you need to know how to calculate the correct income tax deductions, taking account of the various rates, allowances and limits that exist.
When do I deduct the money from the employee’s pay?
You deduct the contributions every time you pay the employee.
How often do I pay the HMRC?
By the 19th of each month - or, if you make electronic payments, by the 22nd of each month - you will have to send the most recent amounts you have deducted from all your employees' pay to HM Revenue & Customs (HMRC). If your average monthly payments are likely to be less than £1,500 you may be able to pay them quarterly. You can also manage PAYE online.
If you pay too little or too late, you may incur interest on these amounts, or receive a fine.
Are benefits taxable?
Employees are also taxed on benefits in kind, such as a company car or medical insurance, and as an employer you will have to pay Class 1A NICs on benefits as employer. You do not have to pay these contributions under the PAYE system - you do so at the year end. These are called taxable benefits.
When to apply PAYE
PAYE is applied to all payments an employee receives as a result of working for you, including:
- salary and wages
- overtime, shift pay and tips
- expense allowances and claims (this only applies where these are paid in cash and, for expense payments, only if they fall within specific criteria - for more details, see our guide on business expenses and dispensations)
- bonuses and commission
- statutory Sick Pay
- statutory Maternity/Paternity/Adoption Pay
- lump sum and compensation payments - such as redundancy payments - unless they are exempt from tax
Tax relief on other deductions
If you give an employee payment other than in cash, such as shares or vouchers, PAYE must be applied to the cash value of such items. Childcare arranged and paid for by an employer and childcare vouchers provided by an employer, up to a value of £55 a week, are exempt from tax and National Insurance, subject to the following conditions:
- The care used must be registered childcare or approved home childcare;
- Where a childcare benefit-in-kind scheme operates it must be available to all employees.
Income tax and National Insurance contribution rates and thresholds may change from year to year.
Employee tax codes
Each taxpayer has a personal tax code issued to them by HM Revenue & Customs (HMRC). You will find this code on a new employee's form P45. You use the code together with HMRC taxable pay tables to work out how much tax to deduct from your employee. You can look up taxable pay tables on the HMRC website.
New employee without a P45
If your new employee doesn't have a form P45 and therefore there isn't a tax code for you to use, they will need to complete a form P46 - which can be done using PAYE Online.
Getting Started
Call the HMRC New Employers Helpline on 0845 60 70 143. They will advise you on what you have to do first and will help you find your way around the PAYE and National Insurance contribution systems.
- Get free confidential advice from your local Business Support Team on a one-to-one basis at any location which suits you. Find contact details of your local Business Support Team at the HMRC website.
- Get a starter pack from HMRC, which contains taxable pay tables and pay calculators, and all the essential forms and information.
For information on PAYE, and how to file online you can visit HMRC's website.