PAYE: your obligation as an employer
PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance contributions (NICs) from employees’ pay as they earn it. The term ’employee’ includes directors of limited companies.
As an employer, you’ll have to deduct tax and NICs from your employees’ pay each pay period and pay Employer’s Class 1 NICs if they earn above a certain threshold. You pay these amounts to HMRC monthly or quarterly. If you don’t send the correct amount, or if you send it in late, you may have to pay interest. After the end of the tax year you must send HMRC an Employer Annual Return (form P35 and forms P14). Almost all employers are required to send this online.
What types of income is PAYE applicable to?
PAYE must be operated on a wide range of employment income, not just on salaries. Many businesses fall foul of the law because they are under the impression that if “round sum” allowances or “pier diems” are paid then as these are “re-imbursements” of “expenses” there is no obligation to operate PAYE. This impression is incorrect. In the UK all payments to employees are termed as “emoluments” and are potentially taxable, no matter what terminology is used to describe them.
PAYE is applied to all the payments that an employee receives as a result of working for the employer, including:
- salary and wages
- overtime, shift pay and tips – unless these are paid directly to your employee or they come out of an independent tronc
- bonuses and commission
- certain expenses allowances paid in cash
- Statutory Sick Pay
- Statutory Maternity, Paternity or Adoption Pay
- lump sum and compensation payments – like redundancy payments – unless they’re exempt from tax
- non-cash items like vouchers, shares or premium bonds – you apply PAYE to the cash value of items like this
However, certain “dispensations” from the general tax treatment are available such as for temporary expatriate workers seconded to work in the UK. These special schemes must be agreed in advance with HMRC before they can be operated.
RKG Consulting will be pleased to guide employers as to the PAYE implications of payments made to employees and to advise employers as to the availability of special PAYE schemes which can be set-up and used to reduce bottom line cost to the company and to retain key employees.