If you’re an employer that’s just starting out in the business world, you have a lot to consider, including PAYE. However, you may not be familiar with PAYE and how it works. If you’re an employee, you should be informed of the ins and outs of PAYE.
What exactly is PAYE? What about PAYE and income tax, or PAYE and pension? Don’t worry – we’ve created a helpful guide all about PAYE. Keep reading for our guide to PAYE.
What Exactly is PAYE?
PAYE is short for Pay As You Earn, and the system was first introduced back in 1944. If you are an employee, you’ll typically pay your tax and National Insurance through PAYE.
PAYE is used in a wide range of industries. Most of the UK workforce are required to pay tax on a monthly basis as opposed to in a lump sum at the end of the tax year. As an employer, it is your responsibility to pay PAYE and make sure all payments are sent to HMRC.
It is the income tax deducted from employees’ salaries before the income is received. PAYE is sent straight to HMRC each time that an employee is paid, so employees won’t see the funds in their accounts. However, they may see the information on their payslips.
There are certain deadlines when it comes to PAYE – you need to pay the PAYE bill in full to HMRC (HM Revenue and Customers) by the required deadlines. It’s not just income tax that is paid through HMRC – it’s also PRSI (Pay Related Social Insurance), and USC (Universal Social Charge).
It’s an effective way of ensuring that the required payments are collected on a regular and timely basis throughout the deadlines. This is a great way of preventing unwanted fines.
Most employers will implement the PAYE system into their payroll. However, if your employees earn less than £120 a week, then you won’t need to register for PAYE – and the same applies if your employees have another job, receive a pension, or get expenses and benefits. Despite this, you are still required to maintain and keep payroll records.
PAYE and Income Tax
PAYE in the UK follows the marginal tax rates – which means that the amount of tax your employees pay depends on their income.
The employee personal allowance in 2022 (until 1st April 2022) is £12,570 per year, £1048 a month, and £242 per week.
The tax rate is currently 20% on the annual earnings over the PAYE threshold, up to a maximum of £37,700. Any earnings between £37,701 and £150,000 are taxed at 40% – which is known as the higher tax rate. The additional tax rate is 45%, which is on earnings over £150,000.
If you’re in control of your payroll, be sure to check your employee’s earnings before submitting them to HMRC. However, the payroll software you use should work out how much National Insurance and Income Tax is owed. Then, report the payments and deductions to HMRC before each and every payday.
If you’re an employer in a small business and you pay under £1500 per month, then you can make arrangements to pay quarterly. Simply contact HMRC to arrange this.
At LJS Accounting Services, we can help with all things payroll, and ensure that all aspects of payroll run as smoothly as possible. This includes reporting the relevant deductions and payments to HMRC. Check out our LJS Pay service and our Payroll and CIS service today to ensure that all things payroll run smoothly.
PAYE and Pension
Another key benefit of PAYE is that it can be used to collect the tax owed from pension payments. When you are paid your pension, your tax will already be deducted – which is why you see their net amount.
The tax will go to your pension provider and then be forwarded on to HMRC. However, many people have more than one pension provider. If you have more than one pension provider, then HMRC will ask one of them to deduct the tax for your pension.
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.