PAYE stands for Pay As You Earn, and if you have full-time employees, you must operate a PAYE scheme. As a director, you are an employee of the company and will be paying your own wages, and so you must register for PAYE at this point even if you are the sole employee. A company formation service can register you for PAYE at the same time as registering your business for VAT. This can save you considerable time and effort.
In a nutshell, PAYE is the money that is taken from your wages and the wages of your employees to be paid as tax. This deduction covers both your income tax and national insurance (NI) contributions, which are then payable to HMRC.
If you fail to put a PAYE system in place, you will become liable for the payment of your employees’ tax, so it is essential that you set one up as soon as you begin to take on full-time staff. You do not need a PAYE system to pay freelancers who are self-employed and therefore liable for their own tax and NI contributions.
The government outlines a personal allowance on which there is no tax payable, which is currently £10,500 (2015-2016). Tax and NI contributions are payable on anything above this, the rate of which will be determined by the total amount of annual income, but for most people will be 20%. As an employer, you will need to deduct the necessary amount for taxes and NI from your employee’s wages before paying it to them, and pay this to HMRC. You will know how much to deduct based on your employee’s tax code, a government-issued code that enables employers to calculate how much PAYE is deductible. To make things simpler, you could instruct an accountant to handle this for you, or you may wish to invest in software such as an employer PAYE calculator to make things easier.
You must register before your first payday, so as soon as you form your company, you should also begin the process of PAYE registration. The process can take up to two weeks, and can be made infinitely easier when you instruct a formation company to do this at the same time they register your business.
As an employer, you are responsible for paying PAYE deductions to HMRC on a monthly basis. These payments must be submitted to HMRC within 14 days of the end of each tax month. As the tax month ends of the 5th, your payment needs to be submitted no later than the 19th. Setting up PAYE electronically can help ensure you submit on time, and reduce the likelihood of you falling into arrears. HMRC are strict when it comes to late and/or non-payment of PAYE & NI contributions, which can potentially lead to difficulties in future.
You can submit PAYE online either directly through the HMRC ‘Online Return & Forms – PAYE’ software, or through third-party payroll software.
Employees should be able to see how much tax and NI has been deducted for that monthly period and for the year to date, as this information should be on their payslip. At the end of the tax year (5th April), you must issue every employee with a P60, an end-of-year statement of sorts that details gross income paid, deductions, and the amount of net PAYE.
As of October 2012, all employers must automatically enrol workers into a workplace pension scheme, known simply as ‘automatic enrolment’.
As an employer, you must ensure your employees are enrolled if they are between 22 years old and State Pension age (normally 55), if they work full-time, if they are work in the UK, and if they earn over £10,000 a year. Should an employee not wish to be part of your workplace pension scheme, they will have to opt out after being automatically enrolled.
A percentage of an employee’s pay should be automatically deposited into the pension scheme each payday, for which you as an employer will receive tax relief. As an employer, you are obligated to provide employees with the following information:
Payment must be made at the same time of the pay run, normally on a date that has been agreed upon between you and your workplace pension provider.
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