14.1 PAYE - A Reminder of Exactly What It
Is
In this module, we will discuss in a
little more detail the online reporting system, which employers are required to
use in order to pass important information regarding deductions to HMRC, as
well as provide a further understanding of this important system.
PAYE is a system that enables employees
to pay their income tax and National Insurance deductions on a weekly or
monthly basis (depending on how often they are paid), through their wages.
These deductions are taken from gross pay before net pay is calculated. An employee
will know how much has been deducted from the information provided on their
payslip.
It is an important fact to remember that
an employer is the one responsible for ensuring that income tax and National
Insurance are paid through PAYE in these circumstances, as opposed to
self-employed personnel, who have the responsibility of reporting to HMRC
themselves. It is for this reason that understanding the PAYE system in its
entirety and covering all areas, is vitally important.
In order to deduct the correct amount of
income tax and National Insurance from an employee's wages, the employer needs
knowledge of the employee's tax code. This is communicated to them from HMRC,
via the Notice of Coding. When a new member of staff starts within the
business, they may initially be on an emergency tax code until HMRC arranges
their proper tax code and communicates it to the employer.
In these
circumstances, it is important to remember that as soon as you receive notice
of the new tax code, your payroll software must be updated accordingly.
Underpayment or overpayment of tax can occur if this is not done in a timely
manner, which can cause distress to the employee, as well as a time-consuming
effort to correct it for the employer. It is important to get it correct the
first time around in order to avoid these issues. In our last module, we
explained more about tax codes and what the letters and numbers contained
within them mean. It is important to reiterate familiarity with tax codes in
order to answer employee queries quickly and effectively.
14.2 How to Report PAYE Information to
HMRC
In our previous modules, we referred
often to the full payment submission (FPS) which you make every week or month
to HMRC, depending on the frequency you pay your employees. This reports how much has been taken from
an employee's wages in terms of statutory deductions, as well as how much has
been taken for voluntary deductions too.
When you decide which form of payroll
software you are going to use, you need to make sure it has the functionality
to report PAYE information to HMRC. Generally speaking, this will not be a
problem if you use HMRC-recommended software, as this function will be included
as standard and it will also have RTI built-in, to allow you to report information
in 'real time'. Real-time reporting, as we have touched upon previously, means
that the information you report is correct and accurate at the time of
reporting it and that there is no delay in sending information. This means that
there is much less chance of a mistake in payroll being reported to HMRC.
If you use an outside source to run your
payroll, which we will explore in a little more detail shortly, you need to
ensure that the software they are using is up to date and correct for your
needs. Generally speaking, a professional will have the correct software for
your needs, however, this is something you do need to check before you employ
them to run this very important part of your business needs.
14.3 Employer's Responsibilities in
Relation to PAYE and Reporting to HMRC
By law, it is the employer's
responsibility to ensure that statutory deductions of income tax and National
Insurance are deducted from an employee's wage via the PAYE online system.
There are very strict deadlines to meet
in relation to PAYE and also consequences for an employer who fails to meet
this responsibility. The PAYE earnings limit changes every year. The current
threshold is included in this introduction to PAYE and payroll for employers on
the UK Government website.
To simplify this important matter:
-Employers must conduct deductions from
their employees' wages through the PAYE online system.
-Employers do not have to use PAYE if none
of their employees is paid over the current limit (see web link above). Even if
this is the case, however, the employer must keep up-to-date and accurate
payroll records, in a confidential manner.
-PAYE takes into account payments to
employees, such as bonuses and tips, as well as statutory sick pay and
maternity pay, and also takes into account deductions, i.e. income tax and
National Insurance, student loan repayments, and other voluntary deductions the
employee has asked to be taken from their wages at the time of payroll
reporting.
-PAYE reporting is done by the employer to
HMRC on or before the day employees are paid, be it weekly or monthly.
-Payroll software will calculate
deductions according to the employees' tax code, which we discussed in more
detail in our previous module. Deductions are made on earnings above the
current limit (see web link above).
-The employer will need to send another
report to HMRC at the same time in order to claim back any reduction on the
amount owed to HMRC, e.g. for statutory maternity pay.
-Small businesses that make under a
certain amount can contact HMRC and arrange to pay on a quarterly basis instead
(please see web link above for current limit). This must be arranged and
permitted by HMRC, not done on an employer's own volition.
These points simplify and generalise the
PAYE system and the employer's responsibilities in relation to it. Put even
more simply, PAYE is your responsibility. There are a few exemptions to online
PAYE reporting to HMRC, and cases where businesses can choose to do this via a
paper form, however, this needs to fall in line with certain guidelines and be
confirmed by HMRC first.
Such situations include:
-The employer who objects to using
technology due to religious reasons
-The employer is receiving care or support
services for themselves, or for a member of their family
-The employer is unable to send reports
via the online system because they are disabled, elderly, or cannot access the
Internet
In these circumstances, HMRC may allow an
employer to use a paper-based reporting system as an alternative to the PAYE
online reporting system.
Another one of your responsibilities as
an employer is to register as a business with HMRC in the first instance
because this will provide you with the necessary login details for the PAYE
system. Once this registration is complete and information on your employees
has been input into your payroll software, keep your payroll records up to
date, as an employer also has the responsibility of reporting to HMRC when an
employee starts and leaves the business. This allows the correct information to
be given to HMRC in terms of PAYE and deductions. You are also responsible for
informing them immediately when an employee reaches state pension age or also
if they become a director.
Another PAYE task you must complete is
running annual reports at the end of the financial/tax, year. This means you
must report to HMRC any expenses or benefits pertaining to that particular tax
year. It is for this reason that many businesses set aside extra time during
the weeks running up to the end of the financial year, to ensure that the
correct information is ready to submit to HMRC by the deadline and that there
are no anomalies which occur and need sorting out within a short deadline.
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