Q&A: PAYE

Chartered accountant Howard S Hackney provides need-to-know answers to questions about PAYE

What is ‘PAYE’?

'PAYE' stands for Pay As You Earn. If you have employees, you must operate a PAYE scheme, which involves deducting income tax and National Insurance (NI) from your employees salary and paying it to HM Revenue & Customs (HMRC). If you fail to do so, you become liable for the tax – not your employee(s). Some disreputable business owners try to argue that they do not have employees and that those who work for them are self-employed, but HMRC will always challenge this. If you employ people, sort out a PAYE scheme for your business.

How do I set up a PAYE scheme?

You simply call the HMRC New Employers’ Helpline on 0845 60 70 143 to obtain your new employer starter pack, which will include your reference number.

How much PAYE should I deduct from employees' earnings?

I’d advise you to buy a simple wages software package, which will do the calculations for you, although the HMRC starter pack gives you the information you need to do it manually. It’s best to assume all earnings are taxable, because you’ll be liable for any tax that isn’t deducted. If you’re in any doubt, seek advice from HMRC.

How and when must I pay them?

You must pay the deductions to HMRC monthly, if the combined National Insurance contributions and PAYE payments for your employees and sub-contractors averages more than £1,500 a month. If the total is less, you can pay quarterly, although it’s better to pay monthly – it lessens the chance you’ll fall into arrears. Payments must reach HMRC within 14 days of the end of each tax month or quarter. Tax months end on the 5th, so your payment needs to be in by the 19th. If you make electronic payments, they need to be in by the 22nd.

What happens if I don’t pay HMRC on time?

Introduced relatively recently, interest is charged on the late payment of PAYE. HMRC takes a dim view of late or non-payment of PAYE & NI, which, after all, is not the employer’s money. Late payment will damage your reputation in the eyes of the authorities, which may cause you difficulties in future.

Are benefits-in-kind paid for through PAYE or are they deducted at the end of the year?

All employees have a coding notice, which enables their employer to calculate the correct amount of tax payable. The coding notice will take into account benefits-in-kind. However, the NI payable on benefits is known as Class 1A NI and you need to calculate this annually at 5 April for payment by 19 July. HMRC must be informed of benefits-in-kind on form P11D or form P9D annually, although changes in vehicles you provide to staff need to be notified at the time of change.

How do I file my PAYE returns?

You can do it online, by completing form P11D either by using third-party software or HMRC’s own ‘Online Return & Forms – PAYE’ software. Should you prefer, you can do it manually, by downloading form P11D from the HMRC website.

How are employees kept informed of how much they have paid under my PAYE scheme?

Each monthly pay slip will show the amount of tax and NI deducted for that month and the amount for the year to date. At the end of the tax year (5 April), each employee must be issued with a P60, which details gross income paid, all deductions and the amount of net PAYE.

Where can I go for more advice about PAYE?

Obviously, a good accountant will be able to advise you. For a fee, they’ll also be happy to manage your PAYE scheme for you. The HMRC website also contains a wealth of information about PAYE and National Insurance. HMRC also publishes a useful guide to PAYE and National Insurance contributions. 

More on this topic:

• How to set up your payroll
• Q&A: VAT registration
• Q&A: Tax returns

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