Serving over 2 Million visitors each year

Search
Free Accounts Software for All Small Businesses
You can now download TAS Basics for FREE. It’s the complete working program and there’s no charge, no obligation and no time limit. Get it now!

PAYE - Overview of Pay as You Earn scheme

print  e-mail 

If you have been an employee working for someone else before starting your own business, then you’ve already been subjected to PAYE, or Pay As You Earn.

It’s a scheme operated by HM Revenue & Customs (HMRC) to take income tax from employees as they earn it. As you’ll know from seeing your payslip, the tax is deducted before you get your hands on the cash!

If you run your business as a sole trader, then you are self employed and not affected by PAYE. You will self assess your income and complete a tax return.

However if you run a limited company and draw a salary, then you are an employee (even if you are a director). You need to understand PAYE and what your obligations as an employer are. It’s a deeply complicated subject with many rules, and you would be well advised to get professional advice on your particular situation.

Many businesses outsource their payroll to bookkeepers or accountants. This can be a cost effective way to keep your paperwork correct and legal, but remember it’s you that is still legally responsible for any mistakes.

How PAYE works

Everyone is entitled to earn a certain amount of money tax free – known as a personal allowance. Other allowances are available depending on circumstances. You then pay tax at rates of 20% and 40%, depending how much salary you earn.

These allowances and rates can be changed in the budget each year. For the latest rates, click here.

PAYE is applied to all payments to an employee, including their normal salary, any overtime, tips, bonuses, Statutory Sick Pay and maternity/paternity pay. You will also need to collect tax on lump sum redundancy payments (although the first £30,000 is tax free).

Employees must also be taxed on benefits they receive, such as a company car or private medical insurance. Typically these benefits are not taxed under PAYE, but are calculated at the end of the tax year and the effect added to the employee’s tax code for the next year.

Calculating PAYE

Every employee is given a tax code by HMRC. As an employer you need to use that and official pay tables to work out how much to deduct from their payroll each month.

Pay tables are available from the HMRC website.

By the 19th of each month (or the 22nd if you make electronic payments) you must send the most recent amounts you have deducted from your employees to HMRC. It’s possible you can make these payments quarterly, if your average monthly payments are less than £1,500.

Keeping records

You are required to keep a record of everything you’ve paid to your employees, using some simple forms available.

You must give your employee a wage slip every time you pay them, to show how that pay was worked out. There are requirements of the information you must give – these are listed here.

You must also provide a P60 form at the end of each tax year, plus a P11d if they have taxable benefits. And finally a P45 form for your employee when they leave you.

You need to keep payroll administration forms with records of all payments. You can consult our guide to key small business payroll forms for more information.

Finally it’s worth knowing that electronic filing for all employers is being phased in.

Potential pitfalls

If you pay too little or too late, you will be charged interest and may even get a fine. There is a highly detailed and useful guide to employers available here on the HMRC website.

Remember to get professional advice from a qualified accountant before taking any action. Don’t rely purely on information contained in this article.

Posted June 1, 2009

Latest articles in Business Tax
 
Annual Investment Allowance limit reduction from April 2012 - what should businesses do?
George Osborne's Emergency Budget gave notice that the Annual Investment Allowance (AIA) annual limit is to be significantly reduced from April 2012. What should businesses do to plan in advance? [August 12, 2010]
 
Accountant provides clarification on how dividends are taxed
A small business accountant provides some clarification on the amount of tax payable by shareholders when dividends are paid, particularly, by private companies. [July 14, 2010]
 
Tax strategies to consider in a high tax environment
The era of the Additional Rate Tax has begun. Partners and the self employed, in fact all non-PAYE earners, who clock up income over £150,000 during the 2010/11 fiscal year will be hoping that the new 50% rate will go away, but it won’t and it is no use burying our heads in the sand. [April 26, 2010]
 
Annual Investment Allowance - how does it work?
One of the few increases in tax allowances disclosed in the Budget last month was a doubling of the Annual Investment Allowance, from £50,000 to £100,000. So, how does the AID work in practice? [April 16, 2010]
 
Business rate changes from October 2010
One of the key announcements from Budget 2010 was in a 'freeze' in business rates for some small companies from October 2010 - so which businesses will benefit, and by how much? [March 26, 2010]
 
Tax tips for entrepreneurs to address before 6th April 2010
Business advisors at Deloitte are urging entrepreneurial businesses to make final reviews of their tax position to ensure their financial house is in order before the start of the next tax year. [March 22, 2010]
 
Declaring dividend payments before 50% tax rate start date
The approaching commencement of the 50% tax rate and the phased withdrawal of personal allowances for those with income between £100,000 and £112,950 are leading those affected to consider tax planning to find potential ways to reduce the increasing tax burden. [March 18, 2010]
 
How long should small businesses keep tax records for?
A new guide has been produced explaining which tax records small businesses (including the self employed and limited companies) should keep, and for how long. [February 25, 2010]
 
Tax relief and Christmas entertainment
We look at how staff parties are treated for tax purposes by HMRC, and what you should bear in mind when an employer provides an employee with seasonal gifts. [December 4, 2009]
 
Paying private bills through your company
You need to be aware of the tax consequences of paying for personal bills via your business - the rules differ depending on whether you are trading as a sole trader, or as a limited company. [November 16, 2009]
 
Guide to Business Rates
This simple guide will help you understand what business rates you might have to pay, how to challenge the rates set, and even if you can claim any relief. [October 29, 2009]
 
How to make the most out of trading loss relief
Under concessions offered in the Finance Bill 2009, trading losses for businesses can now be carried back up to a maximum of three years. How the rules work. [October 13, 2009]
 
Claiming travel expenses from home to work - the rules
Whether you are a limited company director, or a sole trader, this article looks out how expense claims for home to work travel are treated by HMRC. [October 9, 2009]
 
How to manage Corporation Tax during a recession
Here are some useful tips to help small businesses manage their corporation tax liabilities during the downturn. [September 18, 2009]
 
How to register your company for corporation tax
One of your first duties as a limited company director is to register your company to pay Corporation Tax. How the registration process works, including which forms you need to complete. [August 5, 2009]
 



Click Here





Our Partners
Key Services
Key Services
Useful Guides
Click Here

© Bytestart Limited 2005-2010 - All Rights Reserved | Terms of Use | Site List | Website Feeds | Rss Feed RSS Feed

Business Insurance, Business Bank Accounts, Public Liability Insurance, Professional Indemnity, Startups, Limited Company, Sole Trader