Employer’s obligations under PAYE

As an employer you have to operate the PAYE (Pay As You Earn) system on the payments made to your employees if their earnings are at or above the Lower Earnings Limit (LEL), which is £97 a week or £421 a month or £5,044 a year for the tax year 2010-2011.

 

Managing PAYE, an employer has to take the following steps:

  • To register with HM Revenue and Customs for PAYE online service, which is the most secure and convenient method to handle PAYE tasks, such as sending documents to HMRC.
  • To choose a payroll system to manage the records and calculations that you have to make in order to work out your employees’ pay and deductions required by PAYE. In general, you can outsource your payroll by hiring an accounting firm or do it in-house electronically or manually.
  • To calculate and deduct Income Tax from an employee’s gross pay each month. To work it out, you first have to take into account the basic Personal Allowance, which is an amount of taxable income an employee can earn each year without paying any tax. This tax-free amount is £6,475 in the tax year 2010-2011. There is no need to deduct any Income Tax from an employee’s gross pay up to this amount. Income tax is paid on employee’s earnings above the level of the basic Personal Allowance. The following tax rates and bands should be used to deduct Income Tax in 2010-11:

    – Basic rate of 20 per cent for the wages and salaries up to £37,400 above the basic Personal Allowance.
    – Higher rate of 40 per cent for the wages and salaries from £37,401 to £150.00 above the basic Personal Allowance.
    – Additional rate of 50 per cent for the wages and salaries over £150,000 above the basic Personal Allowance.

Additionally, employees using their own cars for employment duties are entitled to Mileage Allowance Payments (MAPs), which are not subject to Income Tax and NICs deductions. To work out the amount of your employee’s MAPs, you have to use the following rates per business mile:

Type of vehicle Mileage Allowance Payment (MAPs) for:
First 10,000 miles Above 10,000 miles
Cars and vans 40p 25p
Motorcycles 24p 24p
Cycles 20p 20p
  • To calculate and deduct employee’s primary Class 1 National Insurance Contributions (NICs) from an employee’s gross pay each month. To work it out you must take into account that in 2010-11 an employee can earn up to £110 a week (£476 a month, £5,715 a year), before paying any National Insurance contributions. It means that as an employer you have to make deductions from an employee’s gross pay only above this earning threshold (ET).

    The following rates and bands should be used to deduct primary Class 1 National Insurance Contributions (NICs) from an employee’s gross pay:
    – 11 per cent on all weekly employment earnings between £110 and £844.
    – Plus 1 per cent on all weekly employment earnings over £844.

  • To calculate employer’s secondary Class 1 National Insurance Contributions (NICs) you owe on your employees’ earnings. Employer Class 1 NICs are paid on the gross wages and salaries of employees as follows:

    – 0 per cent on the employees’ earnings up to £110 a week (£476 a month, £5,715 a year).
    – 12.8 per cent on the employees’ earnings above £110 a week.

  • To keep records of each employee’s payment and PAYE deduction on a separate form P11 or by using electronic methods (commercial payroll software).
  • To transfer the Income Tax and NICs deductions to HMRC by the 22nd of each month.
  • To pay your employees after Income Tax and NICs deductions in accordance with their employment contracts. Being an employer you are legally obliged to pay your employees at least the minimum wage, which currently is £5.93 per hour for workers aged 21 years or more and £4.92 for those between 18 and 20 years.
  • To hand in or send a pay statement (payslip) in paper or electronic form to each of your employees before or at the time you pay them. The pay statement (payslip) must contain certain details such as gross pay before any deduction, all deductions and their purposes as well as take home pay, which is the net amount payable.
  • To give each employee a summary of his pay and deductions, such as:

    – A form P60 in paper format each year before 1 June following the end of the tax year.
    – A form P45 in paper format if you have terminated an employment contract. The form P45 should include the following details: employee’s National Insurance Number (NIN), tax code and his total pay along with deductions to the date of termination of employment.

  • To file online and send an Employer Annual Return (form P35 and P14s) to HM Revenue and Customs by no later than 19 May after the end of the tax year. The Employer Annual Return is a summary of your payroll figures for the tax year.
  • To report to HMRC all expenses and benefits provided for employees and pay any Class 1 A National Insurance contributions (NICs) and Income Tax due on it. The most common expenses and benefits are company car, health insurance, company low interest loans, childcare, living accommodation, travel and entertainment expenses. If you provide your employees with anything other than wages and salaries, it may be classified as expenses and benefits, which are generally subject to the PAYE regulations Consequently, as an employer you are under a legal obligation to deduct Income Tax and NICs from the expenses and benefits delivered to employees.

Capital Business Links Ltd specializes in PAYE accounting and taxation. We will be happy to assist you in running your payroll, preparing your payslips as well as completing your PAYE forms and returns for HIMRC. If you would like to learn more about our PAYE services or need a helping hand in any PAYE issue, please contact us on telephone number 0208 567 99 44 or at our e-mail address.