PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NICs) from employees (including directors of limited companies). The tax and NICs is deducted throughout the tax year based on the employees' earnings and then paid to HMRC.
You must deduct tax and NICs from employees' pay each pay period and pay your employer's Class 1 NICs if they earn above a certain threshold. Your payroll software should do this. You will pay these amounts to HMRC monthly or quarterly.
You must submit a Full Payment Submission (FPS) online, on or before each payday, to tell HMRC about payments made to all your employees and confirm the tax, NICs and other deductions. Again, your software should do this each time you run the payroll to calculate PAYE. You will need to do this regardless of the amount you've paid them or how long they've been working for you.
You must pay the correct amount, based on your FPS submission on time. If you don't you may have to pay interest or penalties.
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You must send PAYE returns electronically to HMRC each time you pay your employees as part of your routine payroll processes. These returns must include details of all employees' pay, tax and deductions. You must do this by sending an FPS on or before each payday, either by using commercial payroll software or HMRC's Basic PAYE Tools. All employees must be included on your FPS - no matter how much they earn - including students.
As an employer you must operate PAYE on the payments made to your employees if their earnings reach the NICs Lower Earnings Limit (LEL).
For the tax year 2013-14, the LEL is:
You must use the employee's tax code and NICs category letter to work out how much Income Tax and NICs to deduct from the employee's pay and how much employer's Class 1 NICs you owe.
You must make payments to HMRC by the 19th of the month (22nd of the month if paying electronically). You may be able to send the amounts due every quarter if your average monthly payments are likely to be less than £1,500.
Pay and deductions: the basics
What's changed - PAYE in real time
Before you pay your first employee for the first time, you must check whether you need to operate PAYE. The guide 'How to register as an employer' tells you when you need to register and how to register.
How to register as an employer
You must apply PAYE to all payments that an employee receives through working for you, including:
What payroll information to report
Different tax and NICs procedures apply to expenses and benefits (such as company cars or medical insurance) that you provide to employees. In certain cases, you have to operate PAYE on the value of an expense or benefit in the same way as for the payments above. If you do this, you need to include the information about the value of benefits in your FPS to HMRC.
But in most cases, you should report to HMRC the expenses or benefits you give to employees at the end of the tax year and make a one-off payment of Class 1A NICs on the value of them.
If you allow an employee the use of a company car, you must report this to HMRC using a form P46 (Car). This must be filed online, using payroll software, if it supports this function, or the PAYE Online for employers service, within 28 days of the end of the quarter when they first had use of the car.
There are also ways you can reduce your paperwork if you do provide expenses and benefits to your employees. This is called a dispensation.
Reporting company cars on form P46 (Car)
As well as deducting Income Tax and NICs from your employees' pay each pay period you might also use the PAYE system to deduct other items, such as:
Pay and deductions - the basics
You must give each employee a pay statement - or payslip - at or before the time they are paid. It can be on paper or in electronic format but it must show specific items, including:
Pay and deductions - the basics
You must keep a record of all payments made to your employees.
For keeping payroll records and working out pay and deductions, you should use commercial payroll software (some of which is free) or HMRC's Basic PAYE Tools package, if it's suitable for you. These do most or all of the calculations that you need to do automatically.
You have to work with special forms at the beginning and end of each tax year.
Forms P9 (T) and P9X: these tell you about the tax codes to use for employees for the new tax year - from 6 April.
Form P7X - this form tells you about any more changes that you'll need to make to your employees' tax codes as a result of the Budget. These changes usually apply from May.
Once you have registered with the PAYE Online for employers service, HMRC will send you these tax code notices online. You will need to log on and check for new notices or add your email address to the service and you will be sent an email alert each time a new notice is sent.
You must give a form P60 to each employee who was working for you on 5 April whose earnings reached the NICs LEL during the tax year. This can be in either paper or electronic format and must be given to the employee before 1 June following the end of the tax year.
At the end of the tax year you need to report employees’ expenses and benefits using form P11D or P9D for each employee (depending on how much the employee has earned) and report the Class 1A NICs liability due on form P11D(b). The forms can be filed online using your payroll software (if it supports this) or the PAYE Online for employers service, and must be filed by 6 July each year.
