PAYE for employers can quickly become complex. But provided you understand HMRC’s rules and your obligations, you can take steps to implement processes that ensure compliance and allow you to approach payruns with confidence.
In this guide, we explain what the PAYE scheme is, what your duties are to report and make payments to HMRC, and how you can ensure a compliant set up for your payroll.
What is the PAYE scheme?
As a UK employer, you normally have to operate Pay As You Earn (PAYE) as part of your payroll. Introduced in 1944, PAYE is the system used by HM Revenue and Customs (HMRC) to collect Income Tax and National Insurance Contributions (NICs) from employment.
Through the PAYE scheme, you’ll need to make deductions for tax and NICs for most employees when paying their salary or wages through payroll. This means that the tax and NICs payable by employees is collected at source. This money is then sent directly to HMRC.
In addition to any employee’s NIC’s, you’ll also need to pay employers’ NICs as part of your PAYE bill. This is a cost borne by the employer, calculated on the basis of your employees’ gross pay. In most cases, your payroll software will calculate how much National Insurance to deduct from your employees’ pay, together with how much you’ll need to pay on top, although you may be eligible for a reduction in your bill under the Employment Allowance scheme.
How does PAYE for employers work?
You’ll need to register for PAYE, and pay your employees through this system, if they earn £123 or more each week, or £533 a month or £6,396 a year. If you’re not required to register for PAYE, you’ll still be required to collect and keep payroll records for your employees.
If you need to operate PAYE, you can choose how to run your payroll. You can operate PAYE by paying a payroll provider to do it for you or by doing it yourself using payroll software. In most cases, unless you’re one of a small number of employers who are exempt from reporting payroll online, you’ll need to send your payroll submissions to HMRC electronically.
If you decide to use a payroll provider, for example, an accountant, you’ll need to consider how much support you’ll need. As you’re responsible for collecting and keeping records of your employee’s details, your payroll provider will need these to run payroll for you. Some providers can offer more support if you need it, for example, keeping employee records, providing payslips and making payments to HMRC. Still, as an employer, you’re legally responsible for completing all PAYE tasks, even if you pay someone else to do them.
If you decide to run payroll yourself, you’ll need to complete certain steps to set this up, including registering as an employer with HMRC and telling them about your employees.
What steps are required to set up PAYE for employers?
When running payroll yourself, you’ll need to complete the following steps:
Register with HMRC as an employer.
When you start employing staff, you’ll need to register as an employer before the first payday and get a login for PAYE Online, even if you’re only employing yourself, for example, as the sole director of a limited company. You cannot register any more than 2 months before you start paying people and it may take up to 5 working days to get your HMRC PAYE reference number. As an employer, you’ll need to use the PAYE Online service to check what you owe HMRC, to pay your bill, to see your payment history and to access employees’ tax codes, amongst other things.
Choose PAYE payroll software
You must choose payroll software that’s recognised by HMRC and reports PAYE information online, unless you’re exempt. You can then use it to record your employees’ details, calculate pay and deductions, and report payroll information to HMRC. You should also consider which other features you’ll need, for example, some software will not let you do things like produce payslips or record pension deductions.
Collect and keep payroll records
You must keep records of what you pay your employees and any deductions that you make, as well as reports and payments made to HMRC, employee leave and sickness absences, tax code notices, and taxable expenses or benefits. You’ll need to retain these records for a period of 3 years from the end of the tax year that these relate to. HMRC may check your records to see that you’re paying the right amount of tax, where your payroll records must show that you’ve reported accurately. If you don’t keep accurate records, HMRC may estimate what you have to pay and charge you a penalty.
Inform HMRC about your employees
You must tell HMRC when you take on a new employee. However, before you pay your new starter, you’ll need to get their employee information to work out their tax code and establish if they need to repay a student loan. If you don’t have an employee’s P45, you can use HMRC’s starter checklist. You can then use these details to set up the employee in your payroll software. You’ll be able to register your employee with HMRC by including their details on a Full Payment Submission (FPS) the very first time you pay them. You’ll need to include information you’ve collected from the employee on the FPS, the tax code and starter declaration that you’ve worked out, and the pay and deductions made since they started working for you.
What monthly HMRC PAYE tasks must be completed?
As an employer that’s operating PAYE as part of your payroll, you’ll need to complete certain tasks each tax month. A tax month will run from the 6th of the month to the 5th of the next. If you pay an employee less than £123 a week, you’ll only usually need to record and report their pay, unless either they have another job or receive a pension. Where you do need to pay an employee through PAYE, on or before each payday, use must your payroll software to:
- Record your employees’ salary or wages, and any other types of pay. Other types of pay include statutory sick pay or statutory pay for parents, together with certain expenses and benefits, where some are reported separately at the end of the tax year, plus any holiday pay, bonuses and commission etc.
- Calculate deductions from your employees’ pay. Your payroll software will work out how much tax and NICs to deduct using the employee’s tax code and National Insurance category letter. You may also need to deduct any student loan repayments, pension contributions, Payroll Giving donations (where employees can make charitable donations directly from their pay before tax is deducted), and any child maintenance payments.
- Produce payslips for each employee. You must give your employees a printed or electronic payslip on or before their payday, where you can use different payroll software if yours doesn’t have this feature. The payslip must show their gross and net wages, any deductions and, if the pay varies depending on time worked, the number of hours worked. Payslips can also include an employee’s tax code and NI number, their rate of pay, the total amount of pay and deductions in the tax year, and should be used to tell employees about the 1.25 percentage point increase in NICs as from 6 April 2022 to help fund the NHS.
- Send a FPS report to HMRC. This is to tell HMRC about payments made to your employees and what deductions you’ve made, even if they get less than £123 per week. You must send the FPS on or before your employees’ payday, even if you pay HMRC quarterly instead of monthly. To complete and send the FPS, follow your payroll software’s instructions.
HMRC will send you a late filing notice if you’ve paid any employees and fail to send a FPS or send one late. Late, missing or incorrect payroll reports can also affect your employees’ income-related benefits, such as Universal Credit. HMRC will close your PAYE scheme if you’re a new employer and you do not send a report to or pay HMRC within 120 days.
What annual HMRC PAYE tasks must be completed?
As part of your regular PAYE reports, you should tell HMRC when a new employee joins or if the circumstances change of an existing employee, for example, if they reach state pension age or become a director. You’ll also need to complete certain annual PAYE reports and tasks to prepare for the following tax year. These annual tasks should include:
- Sending your final payroll report of the year: you’ll need to submit a final FPS on or before your employees’ last payday of the tax year, which ends on 5 April.
- Updating employee payroll records: for every employee working for you as of 6 April, you’ll need to prepare a payroll record, identify the correct tax code to use in the new tax year and enter that tax code in your payroll software. You should include all employees you pay in the tax year, no matter how much you pay them and any employee who has worked for you in the current tax year, since 6 April, even if they’ve already left.
- Updating payroll software: from 6 April, or earlier if the software provider asks you to, you’ll need to follow your software provider’s instructions to update your payroll software so it uses the latest rates and thresholds for Income Tax, NIC’s and student loan repayments.
- Giving your employees a P60: you’ll need to provide a P60 to all employees on your payroll who are still working for you on the last day of the tax year, 5 April, and you must do so by 31 May. The P60 summarises their total pay and deductions for the year.
- Reporting expenses and benefits: you must report any taxable expenses and benefits to HMRC by 6 July, where you can usually do this using your payroll software. You must also pay any Class 1A National Insurance due by 22 July, or 19 July if paying by post.
When is HMRC PAYE tax payable?
Having submitted a FPS, you can view how much tax and NICs you owe in your HMRC online account from the 12th of the following month. You can claim any reduction on what you’ll owe HMRC, for example, statutory pay for parents, by sending an Employer Payment Summary (EPS) by the 19th of that month. You can then view the balance of what you owe within 2 days, or by the 14th if you sent the EPS before the 11th.
When running payroll through PAYE, every month you’ll have to pay HMRC the tax and NICs you owe as reported on your FPS in the previous tax month, minus the reductions on any EPS you sent before the 19th in the current tax month. You must pay HMRC what you owe by the 22nd if you pay monthly, or the 19th if paying by post, where you may be charged a penalty if you don’t pay on time or in full. If you’re a small employer expecting to pay less than £1,500 per month, you may be able to arrange to pay quarterly instead of monthly.
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The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law or tax rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert professional advice should be sought.