PAYE: The basics

Introduction

PAYE (Pay As You Earn) is HM Revenue & Customs system for collecting income tax from the pay of employees, including directors, as they earn it.

As an employer, you need to deduct income tax and National Insurance contributions (NICs) from your employees' pay and submit the deductions to HM Revenue & Customs.

This guide explains how you deduct income tax and NICs, introducing the various forms and processes involved.

Employer's responsibility for PAYE

If you employ people, including any directors of a limited company, you will need to deduct any income tax and National Insurance contributions (NICs) they owe from their pay, before they receive it.

As an employer, you need to know how to calculate the correct income tax deductions, taking account of the various rates, allowances and limits that exist.

By the 19th of each month - or, if you make electronic payments, by the 22nd of each month - you will have to send the most recent amounts you have deducted from all your employees' pay to HM Revenue & Customs.  If your average monthly payments are likely to be less than £1,500 you may be able to pay them quarterly.

Employees and directors are also taxed on benefits in kind - such as a company car or medical insurance, and as an employer  you will have to pay Class 1A NICs on benefits as employer. You do not have to pay these contributions under the PAYE system -  you do so at the year end.

You can also manage your PAYE online using PAYE Online for Employers. Once registered you can complete form P11D using either third party software or HM Revenue & Customs' free 'Online Return & Forms - PAYE' product. 

Alternatively, you can  download form P11D from the HM Revenue & Customs website (PDF).

Getting started with PAYE

When you first start employing people, you may find it a challenge dealing with all the forms and procedures involved in organising your payroll.  You will learn the parts of the PAYE system that apply to your particular business situation in stages, as and when they apply to your business.

At first, many employers decide to use an outside supplier  - usually an accountant  - to run their payroll for them. An experienced accountant can tell you what systems and forms to use, making sure you don't miss out any essential steps..

Actions to get you started

• Ring the HM Revenue & Customs New Employers Helpline on Tel 0845 60 70 143. They will advise you on what you have to do first and will help you find your way around the PAYE and National Insurance contribution systems.
• Get free confidential advice from your local Business Support Team on a one-to-one basis at any location which suits you. Find contact details of your local Business Support Team at the HM Revenue & Customs website.
• Get a starter pack by calling HM Revenue & Customs New Employers Helpline. The pack contains taxable pay tables and pay calculators, as well as all the essential forms and information.

When to apply PAYE

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

• salary  and wages
• overtime, shift pay and tips
• expense allowances and claims (this only applies where these are paid in cash and, for expense payments, only if they fall within specific criteria
• bonuses  and commission
• Statutory Sick Pay
• Statutory Maternity/Paternity/Adoption Pay
• lump sum  and compensation payments - such as redundancy payments - unless they are exempt from tax

Tax relief on other deductions

If you give an employee payments other than in cash, such as shares or vouchers, PAYE must be applied to the cash value of such items. From April 2005, childcare arranged and paid for by an employer and childcare vouchers provided by an employer (up to a value of £50 a week) are exempt from tax and National Insurance, subject to the following conditions:

• The care used must be registered childcare or approved home childcare.
• Where a childcare benefit-in-kind scheme operates it must be available to all employees.

Note that income tax and National Insurance contribution rates and thresholds may change from year to year.

Employee tax codes

Each taxpayer has a personal tax code issued to them by HM Revenue & Customs. You will find this code on a new employee's form P45. You use the code together with HM Revenue & Customs taxable pay tables to work out how much tax to deduct from your employee. You can look up taxable pay tables on the HM Revenue & Customs website.

New employee without a P45

If your new employee doesn't have a form P45 and therefore there isn't a tax code for you to use, they will probably need to complete a form P46 - which can be done using PAYE Online for Employers.

Find details on completing form P46 at the HM Revenue & Customs website.

PAYE forms - and when to use them

PAYE has to cater for many different employment and tax situations. There are basic forms and procedures which almost every employer needs to use to operate the system. You should use these forms to keep a record  of everything you've paid your employees, including wages, payments and benefits.  The following are some of the main forms you will come across.

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 internal forms that you create and give to your employees to show how their pay has been calculated - see details of what a wage slip or pay statement must include on the DTI website.
• Form P45  - new employees who have had a job before will bring this to you when they start to work for you. In turn, you give them a completed P45 when they leave, which they pass  on to their new employer.
• Form P60 -  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 HM Revenue & Customs website.

Payroll administration forms

If you employ staff you need to keep a record of all salary payments made, including NICs. You can  download a specimen form P11 Deductions Working Sheet from the HM Revenue & Customs website (PDF) to record these details -  this can also be used as the basis of your wages record.

Where to get further information on PAYE

You can order a number of helpful guides from the  HM Revenue & Customs Employers Orderline on Tel 0845 7 646 646. You can also:

• download the employer's guide to PAYE and NICs from the HM Revenue & Customs website (PDF)
• download a step-by-step guide to PAYE from the HM Revenue & Customs website (PDF)
• download a catalogue of leaflets and booklets from the HM Revenue & Customs website (PDF), which explain the basics of PAYE and NICs, and  include brief details on  working out how much to deduct from your employees' pay

Alternatively, you can find an employer's information guide in the form of a diary/planner  on the HM Revenue & Customs website.

The planner tells you about:

• what forms HM Revenue & Customs will be sending to you during the tax year
• what you have to do at important stages in the tax year
• contacts, helpline numbers and locations of tax offices
• HM Revenue & Customs publications for employers
• forms and information packs you can download from HM Revenue & Customs site

Any HM Revenue & Customs tax office will also be able to give you help and advice.

HM Revenue & Customs New Employers Helpline

0845 60 70 143

HM Revenue & Customs Employers Helpline

08457 143 143

HM Revenue & Customs Employers Orderline

0845 7 646 646

Related web sites you might find useful

Download the forms you need for Maternity Paternity and Adoption Pay from the HM Revenue & Customs website (PDF)
http://www.inlandrevenue.gov.uk/

Download form P11D at the HM Revenue & Customs website (PDF)
http://www.inlandrevenue.gov.uk/

Get free one-to-one advice from your local Business Support Team at the HM Revenue & Customs website
http://www.inlandrevenue.gov.uk/bst/index.htm

Download information on tips, gratuities, service charges and troncs from the Inland Revenue website (PDF)
http://www.inlandrevenue.gov.uk/

Look up taxable pay tables on the HM Revenue & Customs website
http://www.inlandrevenue.gov.uk/

Find out what to do if your employee has no form P45 on the HM Revenue & Customs website
http://www.inlandrevenue.gov.uk/

Find out what you need to include on a wages slip on the DTI website
http://www.dti.gov.uk/

Get online payroll guidance at the HM Revenue & Customs website
http://www.inlandrevenue.gov.uk/

Download an overview of PAYE and National Insurance from the HM Revenue & Customs website (PDF)
http://www.inlandrevenue.gov.uk/

Find PAYE booklets and leaflets on the HM Revenue & Customs website
http://www.inlandrevenue.gov.uk/leaflets