The PAYE system is used by employers all across the UK. But what is it exactly? In this short piece, we run through all of the key information, requirements and deadlines.
What is PAYE?
The Pay As You Earn system, otherwise referred to as PAYE, is the system that allows employers to deduct tax and National Insurance contributions (NICs) directly from their employees' earnings.
The vast majority of UK employers use a PAYE payroll system to ensure that they can accurately work out how much income tax and NICs their employees owe. The deductible amount is then removed from employees' wages prior to being paid.
The amount of each deduction is determined by a number of factors including, individual employee's tax code, their National Insurance category letter and their earnings. Pension contributions, any student loan repayments and child maintenance payments also affect how much is deducted.
Do I need a PAYE system?
The answer to this question is "Yes" in the vast majority of cases; however, there are a few exceptions.
For example, if you own a business and not one of your employees is paid £120 or more a week, receives expenses and benefits solely, has another job or receives a pension, then there's no need to register for PAYE.
In the unlikely event that you do fall within this category, it is still important to remember that you must maintain a full record of your payroll history.
How can I set up PAYE payroll?
Setting up your PAYE payroll isn't the hardest thing in the world. While many companies may choose to employ the services of an accountant to help them along the way, others prefer to go at it alone. Either way, it is always best to have your own PAYE credentials.
However, before setting up a PAYE payroll, several administrative tasks will need to be completed.
- Register as an employer with HMRC and receive a login for PAYE Online. This usually takes five working days following registration.
- Choose your payroll software. This will allow you to record employee details, calculate pay and deductions and report to HMRC. PayFit is a government-approved payroll provider and is listed on the Government's website.
After setting up your PAYE scheme, you also have the following ongoing obligations:
- Record and keep records of all money paid to employees. The records must be accurate as these will be reported to HMRC.
- You must inform HMRC about your employees and let them know of any changes that occur.
- Record pay, make deductions and report to HMRC either on or before each payroll run.
What does a PAYE payslip look like?
Employees must be provided with a payslip either on or before payday.
Each payslip should contain information such as gross wages (all earnings before deductions), deductions, the take-home wage (gross wages minus deductions), hours worked (if applicable), hourly wage (if applicable), NI number, tax code, and all earnings and deductions taken up to that point in the tax year.
With PayFit's payroll software, all payroll data is automatically calculated, payslips get updated in real-time and generated within the app.
You can also control when your employee receives their payslip; however, it will always be sent to the employee's secure space no later than payday. Your employee can also choose to use their personal email address for the employee space login so that if they leave your company, they can still log in to view and download their payslips.
How can payroll software help with PAYE?
PAYE pay includes tips, benefits, commission, bonuses and various statutory pay such as maternity, paternity, adoption and sick pay. Payroll software, such as PayFit's, can help companies calculate their pay and deductions accurately and efficiently.
It can also help with regards to reporting to HMRC. All employee payments and deductions must be reported to HMRC either before or on the date payroll is run. Companies are also required to inform HMRC if they employ any new members of staff or if an existing employee's circumstances change at all.
PayFit can help here too as it allows all PAYE information to be reported to HMRC online and in real-time.
As with any tax system, there is a certain amount of "paperwork".
There are four different types of PAYE form - P11D, P11D(b), P45 and P60.
- 📋 P11D - A P11D is a form that is used to detail benefits received by an employee that haven't been payrolled or included in a PAYE Settlement Agreement (PSA).
- 📋 P11D(b) - An employer will need to submit a P11D(b) form if they've already previously submitted a P11D form.
- 📋 P45 - This is a document that is issued to an employee at the end of their employment. It details exactly how much taxable income an employee has received as well as the total amount of tax paid.
- 📋 P60 - A P60, otherwise known as an End of Year Certificate, details an employee's total taxable gross earned throughout the year. It is also broken down between current employment and previous employment.
PayFit produces all of these PAYE forms on your behalf and sends them securely to employees.
Payslips are found on the employee space after payroll has run on the date of your choice, no later than payday.
P45s can be found in the employer space to be given to employees.
P60s and P11Ds are distributed to employees via a secure link at the end of each tax year.
The data you input into your payroll software will reveal how much PAYE tax you need to pay HMRC. Typically, this is paid on a monthly basis, although smaller businesses that pay less than £1,500 a month can pay their bill every three months.
Once paid, you can make sure that HMRC has received the payment by checking your HMRC online account.
The PayFit app provides employers with a monthly P32 record so that you can reconcile your HMRC account and pay the HMRC. The P32 record includes basic tax and NIC deductions as well as more complex deductions and payments such as apprenticeship levy, statutory reclaims and employment allowance.
What are the PAYE tax deadlines?
PAYE bills must be paid to HMRC by the 22nd of the next tax month, providing you pay monthly.
If you pay quarterly, then the amount must be paid after the end of the quarter.
The Payments to Make section of the PayFit app will tell you what payment is due, how much is due, what period this relates to and when the payment is due.
What happens if I fail to pay the right amount to HMRC?
Should you fail to pay the right amount to HMRC, then you run the risk of paying interest and penalty payments.
As an employer, you are legally responsible for completing PAYE tasks, even if you choose to outsource them to a third party.
It is vital that all business owners, big or small, understand payroll and PAYE tax properly so that penalties can be avoided and staff remain paid correctly and on time.
Receiving PAYE tax refunds
Employers can claim a deduction on the money owed to HMRC by sending an Employer Payment Summary (EPS) by the 19th of the following tax month.
Any overpaid tax can be used as credit for future payments; however, if you'd prefer, you can apply to receive a PAYE tax refund.
PayFit will automatically include any overpayment corrections on the P32 record to be offset in your HMRC payment.
Want to know more about PayFit?
Are you keen to find out more about how PayFit can improve your payroll processes? Then book a demo with one of our product specialists today!
PayFit blog author