PAYE - What Is PAYE (Pay As You Earn)?

HMRC needs a way of accurately recording, and receiving the amount of income tax and national insurance everyone pays. The way that HMRC does this is through a system called PAYE (Pay As You Earn). Your employer calculates, and then makes, the necessary deductions from your pay, and then pays these deductions to HMRC.

The responsibility of making the correct deductions lies solely with the employer, and this includes all employees. NOTE: If your company is a limited company, then any directors qualify as an employee.

If you are paying electronically, the deductions must be paid to HMRC by the 22nd of each month. If you pay by any other means, then the deductions need to have reached HMRC by the 19th of each month.

If your average monthly payments are less than £1,500, you can request to pay the PAYE quarterly.

Furthermore, if any benefits are handed out by the employer, Class 1A NIC is paid on these benefits, and should be paid by 6th July after the end of each tax year.

With all the different forms and regulations that need to be followed, once you take on your first employee, you may just wish you hadn't! The tax rates, allowances and regulations can be hard to keep on top of, as they're constantly changing. It is often simpler, and a lot more time-effective, to get your Accountant, or a payroll agency to take care of the payroll for you, leaving you with less stress, and more time!

What does PAYE (Pay As You Earn) apply to?

For all types of payment to an employee, PAYE applies. As an example, some of the most common payments are listed below:

• Tips


• Expense allowances and claims when paid in cash


• Overtime


• Bonuses and Commission


• Statutory Sick Pay


• Statutory Maternity/Paternity/Adoption Pay


• Salary & Wages


• Payments other than in cash, for example shares of vouchers


• Lump sum and compensation payments including redundancy - unless they are exempt from tax

For any benefits that are taxable (most are), you will need to declare them to HMRC by using form P11D or P9D.

Paperwork Involved In PAYE

That's right - the dreaded paperwork! There are numerous different forms used for PAYE, but there are certain forms which all employers will use at some point. The most used of these are:

• P11 Deductions working sheet - This can be either manual, or computerized, but records all NIC and salary payments made


• Pay Slips - these are your own forms which you give to your employees in order to show them how their pay has been calculated


• Form P45 - If you hire a new employee, and they have had a previous job, they will give you a copy of this form from their previous employer, and you need to do the same with employees who leave your employment


• P35 - This summarises all deductions made from employees in the year to 5th April. It's also know as the Employer's Annual Return.


• P11D - As mentioned earlier, this is the form you use to provide details of any benefits and/or expenses paid to employees who earn over £8,500 and all directors.


• P14/P60 - This is the end of year summary which is given to the employee. Copies also need to be sent to HMRC

New Employees

Each employee is assigned their own tax code by HMRC. Once they have been assigned their tax code, the employer is then provided with these details, in order to correctly calculate the amount of income tax and national insurance that needs to be deducted from the employee's pay.

For new employees who have had a previous employment, this tax code will be on their P45. If a new employee has not had any previous employment, the employee and employer must complete form P46 in order to get a tax code assigned to the employee. For the time being, you will need to use the tax code given in section 2 of form P46.

Then, using the relevant tax & national insurance tables in conjunction with the employee's tax code, the employer calculates and deducts any tax & national insurance payable.

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