Pay as you earn — more commonly known as PAYE — is the easiest way for you to pay Income Tax and National Insurance contributions for your business. You will deduct these contributions from your employees’ wages, and it is your responsibility as their employer to make sure the tax gets paid.
You do not need to pay self-employed workers through PAYE. Further, if none of your employees are paid more than £113 a week, and they do not have a pension, a second job, or receive expenses or benefits, then you will not need to register for PAYE. However, you will still need to keep accurate payroll records for them and if they ask, you need to provide them with a pension scheme, but you will not need to contribute anything towards it yourself until they start earning over £113 a week.
It is these records with payroll that help you to correctly pay the right tax for your employees. There are different ways that you can run your payroll in your business. You can either hire a payroll provider to run it for you, or you can take control yourself and use a payroll software in your business. Take the time to consider which option is best for you, and keep in mind the other responsibilities you have in both your business and personal life. If you do not have the capacity to maintain accurate records yourself, you should seriously consider hiring a specialist to do it for you.
If you decide that you do not want to handle PAYE yourself, you can hire a professional to run it for you. Different providers offer different services, so you will need to do some research and find the best one for your business and your budget. An accountant may be able to offer you this service, or you can find an independent provider.
However, you will still need to keep records about your employees, and share them with your payroll provider. They will always need to have the most up-to-date information about your employees so they can make sure they are paying the right Income Tax and National Insurance contributions.
Running payroll yourself
If you decide to run your payroll yourself, there are a number of different tasks that you will need to tick off your list:
1) Register as an employer with HMRC (if you have not already)
Before you can start updating employee records and setting up your payroll, you will need to make sure that you are registered as an employer with HMRC. You can do this really easily online. Just make sure your employee is registered before their first payday rolls around.
2) Sign up for PAYE online
Once you have registered as an employer, you can get your PAYE account set up so you can pay your employees for all the hard work they put in to your business.
You can use your PAYE online account to send payroll reports directly to HMRC, access your employees’ tax codes and notices, get alerts from HMRC about your reports and payments, and, if necessary, appeal a penalty.
3) Choose your payroll software
There are lots of different options available to you, and you will need to do some research before committing to a payroll software. HMRC have tested free payroll software you can use if you have fewer than 10 employees, as well as paid-for software for businesses with over 10 members of staff, but there are many options available to you.
The free PAYE tool that HMRC point you towards is great, but it is important to note that it does not account for auto enrolment duties. So, make sure you understand what your responsibilities are for your staff regarding their pensions.
When choosing your payroll software, you will might want to think first about what you actually need it to do for you, as that will affect the price you will be paying for it. Consider whether you need your software to:
• produce payslips
• record pension deductions and comply with auto enrolment
• make pension payments
• pay different people at different times (for example, weekly and monthly payments)
• send updated reports to HMRC.
4) Keep records
You need to keep records for up to three years after that tax year has ended, in case any issues come up later down the line. You will need to record:
• what you pay your employees and any deductions you make
• any payments you make to HMRC
• employee leave and sickness absences
• tax code notices
• taxable expenses or benefits
• Payroll Giving Scheme documents if they apply to your business.
5) Tell HMRC about your employees
Every time a new employee joins your business, you will need to update HMRC and your PAYE online account. This ensures that both you and your new team member will receive and make the right payments.
To register your employee, you will need to fill out what is called a Full Payment Submission for the first time you pay them. You submit this using your payroll software and you need lots of information to hand in order to complete the form. Much of this you will be able to learn from their P45 from their previous employment. You will need your employee’s:
• full name
• date of birth
• full address
• National Insurance number
• tax code
• starter declaration
• start date for their new position with you
• leaving date from their last job
• total pay and tax paid to date for the current tax year
• qualifying deductions for student loans and National Insurance.
Once you have completed all these steps, you will be ready to pay whatever tax and National Insurance your business and employees owe to HMRC.
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