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 is PAYE in the UK?
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 is required to pay tax every month 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 that 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 payroll records.
How Does PAYE Work?
PAYE, or Pay As You Earn, is a tax system commonly used in many countries to collect income tax from employees’ paychecks throughout the year, rather than in a lump sum at the end. Here’s how it works:
- Employer Deduction: When you start a job, your employer calculates your income tax based on your earnings and the tax code provided by HM Revenue and Customs (HMRC).
- Tax-Free Allowance: Each individual is entitled to a tax-free allowance, which means a portion of their income is not subject to PAYE tax. This is deducted before calculating the tax owed.
- Tax Bands: Different portions of your income are taxed at different rates depending on the tax band you fall into. For example, in the UK, there are different tax bands such as basic rate, higher rate, and additional rate.
- Automatic Deductions: Your employer deducts the appropriate amount of income tax, National Insurance contributions, and any other relevant deductions from your paycheck before paying you.
- Reporting to HMRC: Employers are responsible for reporting the deductions made from employees’ pay to HMRC regularly.
- Annual Reconciliation: At the end of the tax year, HMRC accommodates the total tax paid through PAYE with the actual tax owed based on the individual’s total income and circumstances. Any overpayment or underpayment is adjusted accordingly.
PAYE simplifies the process of paying income tax for employees and ensures that taxes are paid regularly throughout the year.
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 April 1, 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 state pension provider and then be forwarded 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 from your pension.
How do You Set up PAYE Payroll?
Setting up PAYE (Pay As You Earn) payroll involves different steps to ensure compliance with tax regulations and accurate payment of employees. Here’s a breakdown of the process:
1. Register with HMRC
The first step is to register as an employer with HM Revenue and Customs (HMRC) in your country. This can be done online through the HMRC website, providing essential details about your business.
2. Obtain Necessary Information
Gather information about your employees, including their full names, addresses, National Insurance numbers, and tax codes. This information is crucial for accurately calculating and deducting taxes.
3. Choose a Payroll System
Select a payroll system that suits the needs of your business. This could be a manual system using spreadsheets or dedicated payroll software that automates calculations and submissions to HMRC.
4. Calculate Payroll Deductions
Use the information collected to calculate the appropriate deductions from employees’ wages, including income tax, National Insurance contributions, and any other deductions such as pension contributions or student loan repayments.
5. Set Up Payment Schedule
Determine how often you will pay your employees (e.g., weekly, bi-weekly, or monthly) and set up a payment schedule. Ensure that you meet all legal requirements regarding payment frequency.
6. Submit Real-Time Information (RTI)
Under the RTI system, you must submit payroll information to HMRC each time you pay your employees. This includes details of wages, deductions, and taxes withheld.
7. Keep Records
Maintain accurate records of payroll transactions, including payslips, tax deductions, and payments to the HMRC. These records are essential for compliance audits and employee inquiries.
By following these steps, you can effectively set up PAYE payroll for your business, ensuring timely and accurate payment of employees while meeting your legal obligations.
Manage Your PAYE Payrolls With LJS Accounting Services
Here at LJS Accounting Services, we offer Payroll and CIS services to save you time and hassle and remove unnecessary worry. But what exactly do we do?
We process your payroll and deal with the HMRC so you don’t have to. This gives you the flexibility and balance you need to focus on your business whilst continuing with what you do best.
We will assign you a specific member of staff to look after you and provide excellent services.
You are in charge at all times, so if at any point you decide you don’t want to continue, give us one month’s notice and we will sort this out for you.
Our payroll services offer a range of benefits, including a clear understanding of the costs and outgoings you have, so you’re in control.
For more information on the services we offer or to speak to a member of our team, don’t hesitate to contact us at 0151 601 0000. We are more than happy to help.
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.
