Table of contents

PAYE: the basics 2

Introduction 2

Employer's responsibility for PAYE 2

Getting started with PAYE 3

When to apply PAYE 4

Employee tax codes 4

PAYE forms - and when to use them 5

Where to get further information on PAYE 6

Here's how I set up a payroll system for my

business 6

Helplines 7

Related guides on businesslink.gov.uk 7

Related web sites you might find useful 8

PAYE, the basics

Created by Business Link on 16 September 2009 14:49You can personalise content from the Business Link websiteand download it in PDF format. This is a free service

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 1

Subjects covered in this guide

Introduction

Employer's responsibility for PAYE

Getting started with PAYE

When to apply PAYE

Employee tax codes

PAYE forms - and when to use them

Where to get further information on PAYE

Here's how I set up a payroll system for mybusiness

Helplines

Related guides on businesslink.gov.uk

Related web sites you might find useful

You can find this guide by navigating to:

Home > Taxes, returns & payroll > PAYEand payroll for employers > PAYE: thebasics

Introduction

PAYE (Pay As You Earn) is the HMRevenue & Customs (HMRC) system forcollecting income tax from the pay ofemployees, including directors, as they earnit.

As an employer, you need to deduct incometax and National Insurance contributions(NICs) from your employees' pay andsubmit the deductions to HMRC.

This guide explains how you deduct incometax and NICs, outlining the various formsand processes involved.

Employer's responsibility for PAYE

If you employ people, including any directorsof a limited company, you will need todeduct income tax and National Insurancecontributions (NICs) from their pay beforethey receive it.

As an employer, you need to know how tocalculate the correct income tax deductions,taking account of the various rates,allowances and limits that exist. For moreinformation, see our section on your taxbill, payments, deadlines, correctionsand refunds.

Payments to HMRC

By the 19th of each month - or, if you makeelectronic payments, by the 22nd of eachmonth - you must ensure that the mostrecent amounts you have deducted from allyour employees' pay has reached HMRevenue & Customs (HMRC).

If your average monthly payments are likely

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 2

to be less than £1,500 you may be able topay them quarterly.

If you pay too little or too late, you may incurinterest on these amounts and/or have topay a fine.

Download the employer further guide toPAYE and NICs from the HMRC website(PDF, 517K) - Opens in a new window.

Taxation of benefits-in-kind

Employees and directors are also taxed onbenefits in kind, such as a company car ormedical insurance.

As an employer you will have to pay Class1A NICs on such benefits. However, you donot have to pay these contributions underthe PAYE (Pay As You Earn) system - youdo so at the year end.

See our section on expenses and benefitsfor employers.

Filing PAYE returns

You can manage your PAYE online usingPAYE Online for Employers. Onceregistered, you can complete form P11Dusing either third-party software or the freeHMRC Online Return & Forms - PAYEproduct. Read about and enrol for PAYEOnline for Employers.

Alternatively, you can download form P11Dfrom the HMRC website (PDF, 149K) -Opens in a new window and make a paperreturn.

Use our interactive tool to find out aboutthe main online transactions you canmake with government.

Getting started with PAYE

When you first start employing people, youmay find it a challenge dealing with all theforms and procedures involved in organisingyour payroll. You will learn the parts of thePAYE (Pay As You Earn) system that applyto your particular business situation instages, as and when they apply to yourbusiness.

Setting up a payroll system

At first, many employers decide to use anoutside supplier - usually an accountant - torun their payroll for them. An experiencedaccountant can tell you what systems andforms to use, making sure you don't missout any essential steps. See our guide onhow to choose and manage anaccountant.

Alternatively you could use a payroll agency,but remember you are still legallyresponsible for any mistakes. You couldinvest in a payroll software package, but itmust comply with HM Revenue & Customs(HMRC) standards. You can get advice ontechnical specifications of PAYE Onlineon the HMRC website - Opens in a newwindow and view a list of accreditedpayroll software products on the HMRCwebsite - Opens in a new window.

Actions to get you started

• Contact the HMRC New EmployerHelpline on Tel 0845 60 70 143 andorder a New Employer Starter Pack.The pack includes the EmployerCD-Rom, which can help you toeasily work out tax and NationalInsurance deductions. You can viewthe contents of the latest NewEmployer Starter Pack on the

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 3

HMRC website - Opens in a newwindow. Staff on the helpline willalso be able to answer any queriesyou may have.

• Get free confidential advice fromyour local HMRC Advice Team on aone-to-one basis at any locationwhich suits you. Find contactdetails of your local Advice Teamon the HMRC website - Opens in anew window.

When to apply PAYE

PAYE (Pay As You Earn) is applied to allcash payments an employee receives as aresult of working for you, including:

• salary and wages• overtime, shift pay and tips• expense allowances and claims (this

only applies where these are paid incash and, for expense payments,only if they fall within specific criteria- for more details, see our guide onexpenses and benefits: the basics)

• bonuses and commission• statutory sick pay• statutory maternity/paternity/adoption

pay• lump-sum and compensation

payments - some payments, egstatutory redundancy payments up tothe value of £30,000, are tax exempt

Taxation of non-cash benefits

Non-cash benefits, eg childcare provision,company cars and health check-ups, may ormay not be subject to PAYE deductions.

Find out about the tax treatment ofnon-cash benefits on the HM Revenue &Customs (HMRC) website - Opens in anew window.

Rates of income tax and NationalInsurance contributions

Note that income tax and National Insurancecontribution rates and thresholds maychange from year to year. See our sectionon your tax bill, payments, deadlines,corrections and refunds and our guide onNational Insurance: the basics.

Employee tax codes

Each taxpayer has a personal tax codeissued to them by HM Revenue & Customs(HMRC). You will find this code on a newemployee's form P45. You use the codetogether with HMRC taxable pay tables towork out how much tax to deduct from youremployee. You can look up taxable paytables on the HMRC website - Opens in anew window.

New employee without a P45

If a new employee doesn't have a form P45and therefore there isn't a tax code for youto use, they will probably need to complete aform P46. You can do either of the following:

• Ask the employee to complete theform themselves.

• Complete the form for the employeeby asking them for the necessaryinformation, eg by getting them to fillin a form you created yourself orasking for the information via email.You do not necessarily need theemployee's signature.

You can submit the paper version of theform - in which case you will need theemployee's signature anyway - but it'squicker and easier to use PAYE Online forEmployers. Read about and enrol for

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 4

PAYE Online for Employers.

Find details of completing form P46 onthe HMRC website - Opens in a newwindow.

PAYE forms - and when to usethem

You must keep records of wages or salaryyou have paid to your employees - but alsoincluding benefits and expenses. You mustalso use these records to give certainpay-related information to employees.

There are a number of basic forms andprocedures you need to use to do this.

Commonly used payroll forms foremployees

There are three main forms to give to youremployees, which show what income taxand National Insurance contributions (NICs)they have paid.

These are:

• Itemised pay statements - theseare internal forms that you createand give to your employees to showhow their pay has been calculated -see details of what a paystatement must include on theDepartment for Business,Innovation & Skills (BIS) website -Opens in a new window.

• Form P45 - new employees whohave had a job before will bring thisto you when they start to work foryou. In turn, you give them acompleted P45 when they leave,which they pass on to their newemployer.

• Form P60 - this shows the taxdeducted for the whole tax year. Youmust give one to each employee bythe 31 May following the end of therelevant tax year. You can order formP60 from the HMRC EmployerOrderline on Tel 08457 646 646.Download specimen forms P14and P60 from the HM Revenue &Customs (HMRC) website (PDF,79K) - Opens in a new window.

If you have 50 or more employees, you mustsend all forms P45 and P46 (including P46(Pen) and P46 (Expat)) online. And undergovernment proposals all employers,regardless of the number of employees, willhave to send this information online from 6April 2011.

Payroll administration forms

If you employ staff you need to keep arecord of all salary payments made,including NICs. You can download aspecimen form P11 Deductions WorkingSheet from the HMRC website (PDF,118K) - Opens in a new window to recordthese details - this can also be used as thebasis of your wages record.

To find out which forms you need to submitat the end of the year, see our guide on howto sort out your PAYE affairs for the endof the tax year.

Read about and enrol for PAYE Onlinefor Employers, or to find out more abouthow electronic filing is being phased in forall employers, read our guide on how to filereturns online.

You can also get regular reminders ofimportant tax dates with our tax deadlineemail alerts.

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 5

Where to get further information onPAYE

You can order a number of helpful guidesfrom the HMRC Employer Orderline on Tel08457 646 646. You can also:

• download the employer's furtherguide to PAYE (Pay As You Earn)and National Insurancecontributions (NICs) from the HMRevenue & Customs (HMRC)website (PDF, 517K) - Opens in anew window

• download a step-by-step guide toPAYE from the HMRC website (PDF)

• download a catalogue of leafletsand booklets from the HMRCwebsite (PDF) - Opens in a newwindow, which explain the basics ofPAYE and NICs, and include briefdetails of working out how much todeduct from your employees' pay

Alternatively, you can find an employer'sinformation guide in the form of adiary/planner on the HMRC website -Opens in a new window.

The planner tells you about:

• what forms HMRC will be sending toyou during the tax year

• what you have to do at importantstages in the tax year

• contacts, helpline numbers andlocations of tax offices

• HMRC publications for employers• forms and information packs you can

download from the HMRC website

Any HMRC tax office will also be able togive you help and advice.

Here's how I set up a payrollsystem for my business

Rebecca Alfandary

Active Designs - Opens in a new window

Rebecca's top tips:

• "Make use of the HM Revenue &Customs website if you get stuck."

• "Get a computerised system as soonas you can. It is easier to set upwhile you only have a fewemployees."

• "Ask your accountant what payrollsoftware they recommend."

Rebecca Alfandary set up her businessActive Designs to supply educationalequipment to primary and nursery schools in1995. When the company took on its firstemployee Rebecca decided to save moneyby setting up a manual, in-house payrollsystem. Now that the business employs five,it uses a payroll software package instead.Here, Rebecca explains how she set up herfirst payroll system and why she decided toget it computerised.

What I did

Contact HM Revenue & Customs

"Setting up a manual payroll system wassomething I'd worried about and put off foras long as I could. I thought it would becomplicated with a lot of form filling, butonce you know what you're doing, it is quitestraightforward.

"I contacted HM Revenue & Customs for aNew Employer's Starter Pack, whichcontains all the information you need to setup a payroll system. I also spoke to a couple

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 6

of HM Revenue & Customs advisers on theNew Employer's Helpline who were veryhelpful."

Complete the right paperwork

"Many of my first employees were secondjobbers, which meant they didn't have a P45from their previous employer. I had to getthem to fill out a P46 and send it to HMRevenue & Customs. Our payroll justinvolves making the standard PAYE andNational Insurance contribution deductions.If there had been other considerations, suchas student loan repayments, I might haveconsidered outsourcing our payroll to anagency.

"When you do a payroll manually you haveto use tables from HM Revenue & Customsto work out how much to deduct. They'redaunting at first, but once you know whatpages to use, it's easy. You basically takethe employee's gross earnings andcross-reference them against the correct taxband. Their personal tax allowance is takeninto account automatically."

Invest in a computerised system

"When we started to employ more people Iasked my accountant about alternatives toour manual system and he recommended awell-known payroll software supplier. It costa couple of hundred pounds plus about£100 a year for the support package. It'spretty essential to have that as they sendyou updates when any rates of thresholdschange, to ensure you're doing yourcalculations correctly.

"Manually, the monthly payroll took a coupleof hours and I would send the deductions offto HM Revenue & Customs by cheque.Now, it takes me 30 minutes, and with the

advent of online banking, I can transfer thedeductions and my employees' wagesdirectly."

What I'd do differently

"I wish I'd invested in the payroll softwaresooner. I thought it would be complicated touse, but it's very simple and a greattimesaver."

Read more case studies that describefirst hand how people tackle real-lifechallenges and opportunities.

Helplines

HMRC New Employer Helpline

0845 60 70 143

HMRC Employer Helpline

08457 143 143

HMRC Employer Orderline

08457 646 646

Related guides onbusinesslink.gov.uk

Manage your personal list of starting-uptasks with our Business start-uporganiser | PAYE Online for Employers |Use our interactive tool to help youcomply with the law when taking on staff| File returns online | Use our interactivetool to find out about the main onlinetransactions you can make with

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 7

government | Your tax bill, payments,deadlines, corrections and refunds |Operate a year-round PAYE system | Setyourself up as an employer | NationalInsurance: the basics | Expenses andbenefits for employers | Avoid commonPAYE mistakes | Choose and manage anaccountant | Outsource your payroll |Choosing a payroll system | Expensesand benefits: the basics | Maternity leaveand pay | Adoption leave and pay |Paternity leave and pay | Pay - anoverview of obligations | Get regularreminders of important tax dates with ourTax deadline email alerts | Sort out yourPAYE affairs for the end of the tax year |Manage student loans, payroll and otherdeductions | Business Advice Open Days| Here's how accounting softwarebrought efficiency savings to mybusiness | Here's how I used anaccountant to help me in my business |

Related web sites you might finduseful

PAYE for employers guidance fromHMRC - Opens in a new window

Online filing benefits information fromHMRC - Opens in a new window

Download form P11D from HMRC (PDF,149K) - Opens in a new window

Download PAYE and National Insurancecontributions guidance from the HMRevenue & Customs website (PDF, 517K)- Opens in a new window

Free one-to-one advice from your localAdvice Team at HMRC - Opens in a newwindow

Employer Pack 2009 from HMRC - Opensin a new window

Catering and service industry tips andgratuities guidance on the HMRC website- Opens in a new window

Non-cash benefits taxation informationfrom HMRC - Opens in a new window

Taxable pay tables from HMRC - Opensin a new window

Form P46 details from HMRC - Opens ina new window

Wage slips guidance from BIS - Opens ina new window

Maternity, paternity and adoption payforms from HMRC - Opens in a newwindow

In-year forms online filing guidance fromHMRC - Opens in a new window

Advice on choosing a payroll systemfrom HMRC - Opens in a new window

PAYE booklets and leaflets from HMRC -Opens in a new window

PAYE: the basics

PAYE, the basics | Created by Business Link on 16 September 2009 14:49 è Crown copyright 2007 Page 8