PAYE in Small Businesses
PAYE stands for Pay As You Earn. It is a salary payment system used by employers which allows an employee to spread your income tax and national insurance payments over the year.
An employer is responsible for making both payments to HM Revenue & Customs. (The Inland Revenue merged with HM Customs & Excise in 2005 to form HM Revenue and Customs.)
Tax and national insurance allowances
- Each tax year an employee has an income tax allowance – an amount of earnings they don’t pay income tax or on. Find out what the different income tax allowances are.
- Each tax year an employee has a national insurance contributions allowance – an amount of earnings they don’t pay national insurance contributions on. Find out what the different national insurance contributions allowances are.
The tax year:
- Runs from 6 April 2009 to 5 April 2010
- Runs from 6 April 2010 to 5 April 2011
- Runs from 6 April 2011 to 5 April 2012
And so on, from the 6 April one year until the 5 April of the following year.
How PAYE payments are calculated
Normally, the total of an employee’s allowances are divided by the number of salary payments you make to them. So if you pay them weekly, their allowances are divided by 52, and if you pay them monthly, they are divided by 12. This system spreads their tax free amounts across the year, giving them a tax free amount in each pay day. You are given a copy of an employee’s tax code by the Tax Office. You use this code to look up how much income tax to deduct from their pay, using the income tax table produced by HM Revenue & Customs. You use a national insurance contributions table to work out what national insurance contributions they should pay.
How do I get a PAYE Code?
- If a new employee comes to work for you straight from leav ing school or college, or is com ing off benefits, you should give them a P46 form to fill in.
- If an employee leaves another job to come to work for you, they should give you a P45 to process. If they do not have a P45, you should give them a P46 form to fill in.
You send the forms to the Tax Office on your employee’s behalf, and the Tax Office sends a PAYE code notification to you.
Filing PAYE paperwork
If you have 50 or more employees you must file certain PAYE paperwork online. If you have fewer than 50 employees, online filing is optional until 2011 – but from 2011, you must also file certain PAYE paperwork online. To register to file paperwork online, go to the How to Register for PAYE online on the HM Revenue & Customs website.
More information
- PAYE – How Do I Process A P45?
- PAYE – How Do I Process A P60 ?
- PAYE – Emergency Tax Codes
- PAYE – Paying Too Much Tax
- PAYE – Keeping Records
- National Insurance Contributions
- Income Tax
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