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PAYE Tax

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Income tax is collected by the PAYE (Pay As You Earn) system for the inland revenue. Usually employees are paid monthly or four weekly and PAYE tax is deducted form the pay of employees, including directors, as they earn it.

Income tax and national insurance contributions are also deducted and submitted to the inland revenue by the employer.

Employer's responsibility for PAYE

If you own a business and have employees, including directors, you should ensure that income tax and national insurance contributions are deducted from their pay, before they receive it. Once all tax and contributions have been deducted the remainder is known as the employees NET pay. Their wage before any deductions is known as their Gross pay.

Employers must ensure they know how to calculate the correct income tax deductions, taking account of different rates, allowances and limits. Deductions made from an employees wage must be sent to the inland revenue by the 19th of each month or, if you make payments electronically, the 22nd. If however the total amount of deductions is less than £1,500 each month you may be able to make quarterly payments.

Employers can choose to manage PAYE online. Once registered they can complete form P11D using either third party software or the Inland Revenue's free 'Online Return & Forms - PAYE' product.

Starting with PAYE

Employers can opt to use the services of an accountant to organise their payroll for them. An experienced accountant can be valuable to guide you through the various forms and procedures which must be completed. They are usually professional and very experienced at this sort of service.
You could seek hel from your local business support team, the Inland Revenue will be able to give you details of where to find your local business support team. The Inland Revenue will be able to advise and provide you with all the right documentation you will require.

When to apply PAYE

PAYE (Pay As You Earn) should be applied to all payments an employee receives as a result of working for an employer, including:

salary, wages, shift pay and overtime
expense allowances and claims which are paid in cash
bonuses and commission
Statutory Sick Pay
Statutory Maternity/Paternity/Adoption Pay
lump sum and compensation payments - such as redundancy payments - unless they are stipulated as being exempt from tax
Tax relief on other deductions

It is worth noting that income tax and National Insurance contribution rates and thresholds may change from year to year.

Employee tax codes

The amount of tax an employee is paid is determined by their tax code, which can be found on the employee's P45 slip. This code tells you how much should be deducted from an employee's pay. These tax rates are determined by the inland revenue.

New employees don't always have a P45 so in these circumstances a P46 form will need to be completed.

PAYE forms - when to use them

PAYE caters for many different employment and tax situations. Employers have to use some basic forms and procedures to operate the system. As an employer you have to keep records of everything you've paid your employees, including wages, payments and benefits.

Some forms for employees

There are three main forms to give to your employees, which show how much income tax and National Insurance contributions (NICs) they have paid.

These are:

Wage slips - these are given to your employees every pay period, they illustrate how their pay has been calculated - you can see details of what a wage slip or pay statement must include on the DTI website.
P45 form - when someone starts working for you they should be able to give you their P45 form which wil tell you how much tax they pay. If an employee leaves employment with you then you have to give them a completed P45 form when they leave, which they pass on to their new employer.
Form P60 - this form shows the tax deducted for the whole tax year, and is given to each employee at the end of the tax year - you can order form P60 on the Inland Revenue website.
Payroll administration forms

If you employ staff you should keep a record of all salary payments made, including NICs. You can download a specimen form P11 Deductions Working Sheet from the Inland Revenue website (PDF) to record these details.