What is PAYE and how does it work?

Income tax on earnings is collected via a PAYE scheme and paid to HMRC on a monthly basis.
Income tax on earnings as an employee is collected through the PAYE scheme. Employers must deduct tax and national insurance contributions from monthly pay using tax tables and tax codes, representing personal tax allowances, supplied by HMRC. The total amount deducted, together with the employer’s national insurance contribution, must be paid to HMRC on a monthly basis. Employers must keep certain records, and must make a Real Time Information (RTI) submission each time an employee is paid. They must also send HMRC a final declaration with the final payment for the tax year.

We act as your company’s agent in all dealings with HMRC relating to PAYE. Once your company is in a position to start paying a salary, we arrange with HMRC to set up a new payroll scheme in the name of your company, and thereafter we liaise with them on all payroll matters. We set up records for each new employee, and process salaries on a monthly or annual basis. Once the payment has been made payslips and summary sheets can be viewed by the principal director using the online payroll system.

Forms P60 (Certificate of pay, income tax and national insurance contributions) will be made available by 31 May following the end of the tax year. P60’s can be viewed and printed via the online payroll system and will be produced for any employee who has been paid during the year and is still in the employment of the company at 5 April. We will also prepare forms P11D (Return of expenses payments and benefits), but please note that P11D information is extracted from your quarterly accounts returns and we therefore need to have received confirmation that all of your transactions have been entered in Competex FreeAgent or all four Excel quarterly returns for the tax year in order to be able to extract the figures.

Please note that since we act as your agent, HMRC should communicate with us on all matters relating to the operation of your payroll. If you receive any correspondence from HMRC that is not of a personal nature and which you think should have been addressed to us, please contact us immediately so that we can correct the situation.

Real Time Information (RTI)

Since 6 April 2013, HMRC has been operating Real Time Information (RTI). RTI doesn’t change the way PAYE is calculated, it just means we need to make more regular submissions to HMRC and they must be on or before the net pay reaches the personal account. Previously this information was provided just once a year at Payroll Year End. 

Each time a salary is processed a Full Payment Submission (FPS) is sent to HMRC advising them of the calculations, the date paid, the period the payment covered, and any recent starters or leavers. Should there be no payments in a pay period (one month), we notify HMRC by sending an Employer Payment Summary (EPS) by the 19th of the following tax month. This will make sure HMRC don’t wrongly send you a penalty because they were expecting an FPS from you. 

If your FPS or EPS is not submitted on time, HMRC may raise an estimated charge – referred to as a ‘specified charge’. HMRC may raise a specified charge for each tax month that you don’t send a real time submission. A specified charge is HMRC’s calculation of what you owe, based on your previous PAYE payment and filing history. By submitting the omitted submission, then the specified charge will be cancelled. However, since 5 March 2015, there is a £100 penalty for late submissions and in order to protect us all, we cease PAYE schemes that have been inactive for a considerable period of time.

National Insurance (NI)

Individuals in employment pay Class 1 National Insurance, and the employer also pays a contribution. As a company employee you may be entitled to an additional pension.

Amy FowlerWhat is PAYE and how does it work?