PAYE & National Insurance
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An Introduction to PAYE
Whether an individual is an employee or self-employed in a particular situation is a question of fact depending on the terms under which he or she works. When you engage someone to do work for you, you have to decide whether or not to apply the PAYE rules. It is up to you to get it right or suffer the consequences.
In certain areas, HM Revenue & Customs has placed emphasis on reclassifying individuals claiming to be self employed. They issued a leaflet, IR56, Employed or Self-employed? setting out the guidelines of employment status in the form of questions. These cover the following principal factors:
- The degree of control and supervision exercised over the individual's work
- Whether services are performed mainly or wholly for one business
- Where the duties are performed
- Terms of pay, holiday time, pension arrangements, and other benefits
- Whether the work has to be performed personally, or whether a substitute may be supplied
- Provision of items of equipment
- The financial risk and responsibility for loss undertaken by the individual
Please note: We strongly recommend that if you are in any doubt as to the status of an individual, ask HM Revenue & Customs to clarify the situation. Obtaining their approval will avoid the risk of you having to make a settlement of liabilities to tax or NI that you failed to deduct from the employee's remuneration.
Before establishing a PAYE system, it is necessary to notify the HM Revenue & Customs by telephoning the New Employers Helpline (0845 607 0143).
Upon registration, HM Revenue & Customs will send you guidelines on operating PAYE, national insurance, statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay, including a number of forms with which to operate the PAYE and NI systems. (See checklist below).
To help you calculate the amount of tax and NI due, HM Revenue & Customs will supply you with sets of tax tables. By referring to these, and an employee's tax code, you will be able to calculate the amount of salary that is not subject to tax. The difference between this figure and the gross amount paid is the employee's taxable pay. The tax can then be calculated by reference to another set of tables. The employer's and employee's NI is calculated by reference to the employee's gross pay in conjunction with a third set of tables. Note, however, several 'benefits' are also subject to NI even where the tax is dealt with on a different basis.
The tax and NI should be paid to HM Revenue & Customs by 19th of the month following payment. Employers whose average monthly payments of PAYE and NI are less than £1,500 in total are allowed to pay quarterly rather than monthly (i.e. by 19th of July, October, January, and April). This should be requested using form P31.
| PAYE checklist |
| Have you contacted the New Employers Helpline? |
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| Have you received the following? |
| Notice of your PAYE and Accounts Office reference numbers |
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| Tables A, SR + B to D, and NIC tables |
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| Day-to-day payroll - Employer's Help Book (E13) |
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| Further Guide to PAYE and NICs (CWG2) |
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| Expenses and Benefits - A Tax Guide (480) |
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| P11D Guide |
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| Class 1A NICs on Benefits In Kind - A Guide for employers (CWG5) |
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| Class 1A NICs on Cars and Fuel - Employers Manual (CA33) |
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| National Insurance for Company Directors (CA44) |
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| What to do if your employee is sick (E14) |
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| Statutory Sick Pay - Employers Manual (CA30) |
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| Pay and time off work for parents (E15) |
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| Pay and time off work for adoptive parents (E16) |
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| Employee Travel - A Tax and NICs Guide for employers (490) |
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| Working Tax Credit paid with wages (E6) |
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| Collection of Student Loans - Employer's Guide |
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| Stakeholder Pensions - A Guide for Employers |
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| Payroll Giving - A Guide for Employers |
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| Be sure to read these carefully |
| Have you familiarised yourself with the following forms? |
| P11 Deductions Working Sheet |
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| P14/P60 End of Year Summary |
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| P11D Return of Expenses Payments and Benefits |
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| P35 Employer's Annual Return |
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| P38A Employer's Supplementary Statement |
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| P45 Details of Employee Leaving |
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| P46 Notice of new employee |
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| P46(Car) Car provided for private use |
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PAYE can be a tortuous procedure for the new businessperson. We would be pleased to show you how to operate it properly or provide a service for the maintenance of your PAYE records.
Electronic filing of PAYE returns
Employers can now file P35, P38A and P14 forms over the internet. Employers will, on a phased basis, be required to file their end of year return electronically from 2004/05. The implementation date will depend on the number of staff involved, but all employers will have to send their returns electronically from May 2010.
Employers with fewer than 50 employees can get tax free 'incentive' payments of up to £825 over five years by filing their
Annual Return online, as follows;
| Tax Year |
Due by 19 May |
Payment |
| 2004/05 |
2005 |
£250 |
| 2005/06 |
2006 |
£250 |
| 2006/07 |
2007 |
£150 |
| 2007/08 |
2008 |
£100 |
| 2008/09 |
2009 |
£75 |
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£825 |
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