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, ES/FSI, 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. See also electronic payment of PAYE.

PAYE checklist
Have you contacted the new employers helpline?
Have you received the following? (most of the following can be found on the free Employers' CD-ROM)
Notice of your PAYE and Accounts Office reference numbers
Tables A, SR B to D, and NIC tables
Day-to-day payroll - Employer's help book (E13)
Further guide to PAYE and NICs (CWG2)
Expenses and Benefits - A Tax Guide (480)
P11D Guide
Class 1A NICs on Benefits In Kind - A Guide for employers (CWG5)
Class 1A NICs on cars and fuel - Employers manual (CA33)
National Insurance for Company Directors (CA44)
What to do if your employee is sick (E14)
Statutory sick pay - Employers manual (CA30)
Pay and time off work for parents (E15)
Pay and time off work for adoptive parents (E16)
Employee travel - A Tax and NICs guide for employers (490)
Working tax credit paid with wages (E6)
Collection of student loans - Employer's guide
Stakeholder pensions - A guide for employers
Payroll giving - A guide for employers
Be sure to read these carefully
Have you familiarised yourself with the following forms?
P11 Deductions working sheet
P14/P60 End of year summary
P11D Return of Expenses Payments and Benefits
P35 Employer's annual return
P38A Employer's supplementary statement
P45 Details of Employee Leaving
P46 Notice of new employee
P46(Car) Car provided for private use
P46(Pension) Employee now paid occupational pension

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 payment of PAYE

Employers who pay electronically have until the 22nd of the month to pay. Where the 22nd falls on a weekend or is a bank holiday, payment must be received by the previous bank working day

Electronic filing of PAYE returns

From May 2010 almost all employers must now file P35, P38A and P14 forms using the internet.

Check your net pay using our Payslip calculator

Do contact us if you would like further help or advice on this subject.