An introduction to PAYE – Pay as You Earn Tax

It may be that your start up business is employing people immediately, or it may be a sign of success, but although you may still fall within the definition of a small business, taking on staff can feel like a quantum leap.

Not only are you likely to now feel responsible for the welfare and livelihood of your employees, there is also legislation and regulations that may well swamp you. There are many employment law rules and you will need to make sure that you have all of the paperwork required to comply with this legislation in order to protect you, your business and your staff.

Employed or self-employed?

There is also the issue of paying employees and operating a Pay As You Earn (PAYE) scheme. The basics do not sound difficult – you just deduct the required income tax and National Insurance (NI) that is dictated by Her Majesty’s Revenue & Customs (HMRC). But as you get involved with providing ‘benefits in kind’ – share options, bonuses, health insurance, or pretty much anything else – the legislation can get complex and it is important to understand that the responsibility for applying the rules correctly rests with you, the employer. It is up to you to get it right or suffer the consequences.

Often people believe that they can avoid the whole employment process by treating everyone they employ as ‘self employed’, be that freelancers, contractors or whatever, and then they can simply be responsible for their own tax.

However, as you might imagine, if it was that easy would anyone have employment status?  Even if you could do this, ‘workers’ can be self employed and obtain certain rights, so not everything can be avoided.

The first thing you must do therefore is determine whether the ‘worker’ is going to be employed or self employed. To enable you to do this the HMRC website provides a test known as the Employment Status Indicator (ESI) which is designed to help employers and workers work out the employment status.

Despite the tests being provided by HMRC, they are only able to provide an indication of employment status. It is not a definitive or legally-binding opinion and HMRC themselves ironically can still challenge the status! It is possible to ask HMRC for a ruling on an individual’s status and this may be the only way to be sure of avoiding a demand at a later date which will also include penalties and interest.

Setting up a PAYE scheme

If after completing these tests, or you just know your staff are ’employees’, then you will need to set up a PAYE scheme.  The first step is to telephone the New Employers’ Helpline to register with HMRC.  After registration they will provide you with guidelines on the following – operating PAYE, NI, statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay.

HMRC will also send you a number of forms with which to operate the PAYE and NI systems. These days even with the HMRC’s online service there are unfortunately quite a lot of areas where you can slip up so you will need to take alot of care.

You will also need to budget for the tax and NI you’ll need to pay to HMRC by the 19th of the month following payment, or the 22nd if you pay online.  If you are a small employer though, and PAYE and NI is less than £1,500 per month, then you will only need to pay quarterly.

With the new Real Time Information rules that came in to force in April 2013, employers and pension providers must submit information to HMRC regarding deductions they have made for PAYE, NI contributions and student loans at the time (or before) each payment is made, rather than at the end of the year.

Finally, and linked to subject of payroll, there are also the new Auto Enrolment Pension requirements where employers must provide a pensions scheme for all workers.

If all this regulation sounds too tortuous though you may choose to avoid it all together and simply outsource the payroll procedures for your company to an accountant or payroll bureau and make it someone else’s problem!

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