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Paying your employees

Paying your employees

As an employer, you have a number of legal obligations to do with paying employees.

This guide aims to help you understand your obligations relating to pay and deductions through the PAYE (Pay As You Earn) system and how these entries should appear on your employee's payslip. It also provides links to related guidance on employee rights in relations to pay on the Business Link website.

On this page:

The National Minimum Wage - your obligations
Issuing pay statements
PAYE and National Insurance deductions
Statutory payments and student loan deductions
Pension deductions
Other pay and deductions
More useful links

The National Minimum Wage - your obligations

As an employer you're legally obliged to pay your workers at least the National Minimum Wage (NMW). The NMW applies to most workers above the school leaving age. The amount that you must pay depends on the age of the worker.

HM Revenue & Customs (HMRC) is responsible for enforcing the NMW.

HMRC guidance on the National Minimum Wage

Current National Minimum Wage rates

Read about about NMW law on the Business Link website

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Issuing pay statements

By law, every pay day you must give your employee a written record of pay and deductions, including:

'gross pay' - before the deduction of tax or National Insurance contributions (NICs) and any other deductions
employee's Class 1 NICs deducted
tax deducted

Depending on the employee's circumstances you may also need to include other payments and deductions on the payslip. The later sections of this guide tell you what these might be but we look at tax and National Insurance first.

At the end of each tax year you must also complete a form P60 End of year certificate providing a summary of the employee's total pay and tax/NICs deductions for year. You must give this to your employee by the 31 May after the end of the tax year.

Read about PAYE tasks at the end of the tax year

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PAYE and National Insurance contributions (NICs) deductions

As an employer you must operate the PAYE (Pay As You Earn) system if your employee earns above a certain amount or meets certain other conditions. (Follow the links at the end of this section to find out what these are.)

Operating PAYE involves:

calculating and deducting PAYE Income Tax from an employee's pay
deducting employee's primary Class 1 NICs from payments of earnings you make to your employees
paying employer's secondary Class 1 NICs on those earnings to HMRC
recording the above deductions on the employee's P11 Deductions Working Sheet or equivalent record
showing the deductions of tax and employee Class 1 NICs as separate items on the employee's payslip

You have to pay all of these deductions to HMRC within set time limits.

Our guides below tell you when you need to start operating PAYE, how to go about calculating the deductions.

Taking on a new employee

Completing form P11: introduction

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Statutory payments and student Loan deductions

Statutory Sick Pay

As an employer you're liable to pay Statutory Sick Pay (SSP) to employees who are off work sick and who meet certain qualifying conditions. SSP provides a minimum level of pay to employees who are absent from work due to sickness.

You should pay any SSP due at the same time and in the same way as normal payments of wages or salary that you make to the employee.

SSP is treated like the wages or salary it replaces. You must make deductions from SSP in respect of PAYE, NICs, student loan repayments, attachment of earnings orders and pension contributions in the same way as you'd make these deductions from normal pay.

When you pay SSP to an employee you must record the SSP paid on the employee's deductions working sheet.

Read an overview of Statutory Sick Pay

How to calculate and recover Statutory Sick Pay

Statutory Maternity Pay, Paternity Pay or Adoption Pay

Employees who become parents - either through birth or adoption - are entitled to pay and time off work, provided they meet certain qualifying conditions. As an employer you must make the appropriate payments to qualifying employees.

Statutory Maternity Pay (SMP) is payable to mothers who are absent from work to have a baby.

On the birth of a baby, Statutory Paternity Pay is payable to the biological father or to the mother's partner (male or female). It's also payable on adoption - either to the partner of a person adopting alone or, where a couple adopt, to the partner who doesn't apply for Statutory Adoption Pay (SAP).

SAP is payable when a child's adopted. Where a couple adopt together, only one person's entitled to SAP.

You must only pay SMP, SPP or SAP if the employee meets certain qualifying conditions. You should pay these in the same way as you would make normal payments of wages and salaries.

You'll be able to recover some or all of the SMP, SPP or SAP that you pay from HMRC.

SMP, SPP and SAP - further guidance including calculating and recovering payments

Student loan deductions

Student loans form part of the government's package of financial help for students in higher education. They're repaid through deductions from pay once the employee's earnings reach a certain level.

HMRC is responsible for collecting repayments of student loans. However, as an employer you'll need to calculate the amount of any repayments due and collect those repayments on our behalf by deducting them from the employee's pay. You must only deduct repayments when one of the following applies:

you receive a form SL1 Start Notice and the employee's total pay is above the student loan threshold
a new employee gives you a form P45 with a 'Y' in the Continue Student Loans deductions box (box 5)
a new employee gives you a form P46 with a tick in box D (Student Loans)

You must record any student loan deductions that you make on the employee's deductions working sheet and pay over the amount you've deducted to us, together with payments of PAYE and NICs.

Although not required by law, it's a good idea and best practice to itemise student loan deductions on the weekly or monthly payslip. You must, however, provide employees with a statement showing the total student loan deductions made in the year. You can do this on form P60 if they're still working for you on 5 April or in some other format if they leave you before this date and their payslips haven't already shown all of the deductions.

Find out how to calculate, record and make student loan deductions

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Pension deductions

As an employer you're not obliged to run a pension scheme. However, if you employ more than five people you will generally need to offer your employees access to a stakeholder pension scheme if you don't already offer one of the following:

an occupational scheme
access to a personal pension scheme into which you contribute at least three per cent of salary

If you give employees access to a pension scheme - whether this is one that you run yourself or one that's administered by a third party - you'll need to deduct your employees' pension contributions from their pay.

Contributions to a registered pension scheme attract tax relief and are deducted from an employees' gross pay.
Contributions to an occupational pension scheme that uses the 'net pay' arrangement are deducted from employees' gross pay.
Contributions to a personal pension scheme must be deducted from employees' net pay after deduction of tax and NI.

Deductions for pension contributions should be shown separately on the employee's payslip.

You must pay pension contributions that you've deducted from your employees' pay into the pension scheme within 19 days of the end of the month in which you made the deductions.

From 16 October 2007, if you administer your pension scheme in-house, you will need to use the HM Revenue & Customs (HMRC) Pension Schemes Online service which provides a secure way of viewing information, making returns and filing reports.

More about HMRC's Pension Schemes Online service

Find out about offering stakeholder pensions on the Pensions regulator website

Read about registered pension schemes and tax relief for employer and employee contributions

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