Initially it can be a challenge to start keeping PAYE records, to know when to apply PAYE, when to give tax relief and what the appropriate employee tax codes are. Many people gladly hand the task of running the payroll over to an accountant or book-keeper, at least initially. An experienced accountant can tell you what systems and forms to use and guide you through the process. But you can do it yourself and learn the parts of the PAYE system that apply to your particular business.
To do it yourself you first ring the HM Revenue & Customs New Employer Helpline (0845 60 70 143), which will give you a starter pack containing taxable pay tables and pay calculators, plus all the other essential forms and information.
When should I apply PAYE?
PAYE is applied to all payments an employee receives as a result of working for you. These payments can include salary and wages, overtime, shift pay and tips, expense allowances (there are varying criteria on expenses so double check with the helpline), bonuses and commission, statutory sick pay, statutory maternity/paternity/adoption pay and lump sum and compensation payments – such as redundancy payments – unless they are exempt from tax. PAYE must also be applied to the cash value of such items as shares or vouchers. However, childcare arranged and paid for by the and employer and childcare vouchers provided by the employer up to £50 a week are exempt from tax and national insurance, subject to certain conditions. Of course the income tax and National Insurance contribution rates and thresholds change from year to year. (See Duport articles on an introduction to tax and National Insurance under Starting a Business).
How do I start to deduct PAYE?
In the starter pack sent when you register, there is a PAYE reference number, booklets and all the forms, tables and information you need to operate your payroll system, and take you through it step by step. Use the CD ROM to familiarize yourself with the system. You will soon become very familiar with the P11 form which you should use as a working sheet to list all wage payments to employees.
Consult the booklet: Paying Someone for the First Time which explains how to fill in a P11 and how to use the tables to work out how much tax and National Insurance is due. You need the employee’s National Insurance and tax code. Each tax payer has a personal tax code and this will be on a new employee’s P45. You use the code together with the HM Revenue & Customs tables to work out how much tax to deduct. If your employee does not have a P45 or a tax code they need to fill in a P46.
PAYE forms – what to use and when to use them
Apart from the P11 which you use each payday to record the income tax and National Insurance due from each employee and the employer’s National Insurance contributions you must pay, there are three main forms to become familiar with. Firstly wage slips, which are internal forms that you create and give to your employees to show how their pay has been calculated Secondly, there are the forms connected with the employees’ pay records at the end of the year – the P60 for example is given at the end of the tax year and shows the tax deducted for the whole tax year. Thirdly the P45, which any new employee who has had a job before will bring to you when they start working for you. When they leave you complete the P45 and they can take it to their new employer.
Wage slips
Employees must be given a payslip or statement every time they are paid. This must be itemised to show their gross wages or salary before you make deductions, plus details of deductions from their pay (this may vary from one period to the next depending on income tax and national insurance contributions for example). In addition, fixed deductions which stay the same every month (e.g. subscriptions) must be shown as well as net wages after tax. If parts of the salary are paid in different ways, then the breakdown must be shown. If tax credits have been paid this must also be show.
Employee’s pay records at the end of the tax year – including P60
For each employee you have prepared a form P11 you must also fill in form P14. This is a three part form, the bottom copy being the P60 most people are familiar with which details total pay, tax and NICs. All employees must be given the P60 by May 31st each year. The top two copies of the form need to be sent to HM Revenue & Customs by mid-May each year. On top of that you will be sent a P35 towards the end of the tax year on which you must summarizes all the P14s you have prepared!
Directors and employees earning over a certain amount who have been paid expenses or benefits that are taxable need to fill in yet more forms (P11 and P11S(b). If your employee earns a very low salary but has been paid taxable benefits or expenses you still have to submit a form (P9D) and give it to the employee by July each year.
P45
The P45 must be completed when an employee leaves for whatever reason. Include details of gross pay, tax code and tax deducted in the year to the date of leaving. Send one part of the form to HM Revenue & Customs and give the other three parts to the employee. If an employee dies, you must complete the form and send all four parts to HM Revenue & Customs.
Payroll administration forms
If you employ staff you must keep a record of all salary payments made, tax and National Insurance. Record all this on the P11 Deductions Working Sheet and also use it as the basis of your wages record. (Download specimen forms from the HM Revenue & Customs website.)
Keep records of total monthly or quarterly payments on form P32 and make sure you send contributions by the 19th of the month, or if your business collects less than £1,500 a month then send quarterly (January 19, April 19, July 19 and October 19). You will automatically receive a payment booklet to send with your payments if you pay by post. You can also pay by BACs, direct debit, bank’s telephone or internet banking, Girobank Billpay or CHAPS.
On the HM Revenue & Customs website there are guides and information plus a useful diary/planner which tells you what forms you will be sent during the tax year and what you have to do at important stages in the tax year, as well as contacts, helpline numbers and locations of tax offices. It also outlines the forms and information packs available for downloading.
How long must I keep records for?
You must keep your records for inspection, whether on computer or paper. You can use your own version of the P11 as long as it includes all the appropriate information, but all pay records, including pension payments need to be kept for at lest three years after the end of the tax year to which they relate. Even minor or irregular benefits must be documented and kept, and you must keep all invoices and receipts.
What if it’s all too much for me?
Keeping on top of PAYE, completing all the forms at the right time and getting them to the correct place can be daunting and time consuming for a new business person. At this point many people begin to wonder if being in business for they are actually worth it. If this is sounds like you, consider using a payroll agency to complete most of the paperwork. Accountants and book-keepers can take the pressure off. There are also payroll software packages available, but be sure to choose one which meets HM Revenue & Customs standards. Even if you do allow someone else to manage the system for you remember you are still legally responsible for operating PAYE.
