How to pay staff with PAYE

PAYE, or pay as you earn, is a system of withholding income tax and National Insurance contributions from your employees’ wages and paying them to HM Revenue and Customs (HMRC) on their behalf. PAYE ensures that your employees pay the right amount of tax and National Insurance throughout the year, and that you fulfil your legal obligations as an employer. In this blog post, we will explain how to pay staff with PAYE, and what you need to do to set up and run your payroll.

Setting up PAYE

Before you can pay staff with PAYE, you need to register as an employer with HMRC. You can do this online, by phone, or by post. You will need to provide some information about your business, such as your name, address, contact details, and the type of business you run. You will also need to provide some information about your employees, such as their names, dates of birth, National Insurance numbers, and tax codes. You will receive a 13-character accounts office reference number and a 10-digit employer PAYE reference number from HMRC, which you will need to use when you pay your staff and report to HMRC.

You will also need to choose a payroll software that can calculate how much tax and National Insurance you need to deduct from your employees’ wages, and send reports to HMRC online. You can use HMRC’s Basic PAYE Tools, which is a free software that can handle up to 10 employees, or you can use a commercial software that is compatible with HMRC’s systems. You can find a list of approved software on HMRC’s website1.

Running your payroll

Once you have set up PAYE, you need to run your payroll every time you pay your staff. This involves:

  • Calculating how much you need to pay your staff, based on their hours, rates, and any bonuses, commissions, or deductions.
  • Calculating how much tax and National Insurance you need to deduct from your staff’s pay, based on their tax codes, allowances, and thresholds.
  • Calculating how much employer’s National Insurance you need to pay on top of your staff’s pay, based on the same thresholds as your staff.
  • Calculating how much Apprenticeship Levy you need to pay, if your annual pay bill is more than £3 million.
  • Sending a Full Payment Submission (FPS) to HMRC, which is a report that contains details of your staff’s pay, tax, National Insurance, and other deductions. You need to send this on or before the day you pay your staff, using your payroll software.
  • Paying your staff, either by cash, cheque, or bank transfer, and giving them a payslip that shows their pay and deductions.
  • Paying HMRC, either monthly or quarterly, depending on your PAYE bill. You need to pay by the 22nd of the next tax month or quarter, using one of the methods that HMRC accepts2.

Keeping records and reporting changes

As an employer, you need to keep records of your payroll for at least 3 years from the end of the tax year they relate to. You need to keep records of:

  • Your staff’s personal details, such as their names, addresses, dates of birth, and National Insurance numbers.
  • Your staff’s pay and deductions, such as their gross pay, tax, National Insurance, student loan repayments, pension contributions, and other deductions.
  • Your payments to HMRC, such as your PAYE bill, your payment reference number, and your payment date.
  • Your reports to HMRC, such as your FPS, your Employer Payment Summary (EPS), and your Earlier Year Update (EYU).

You also need to report any changes to HMRC, such as:

  • Changes to your staff’s personal details, such as their address, marital status, or name.
  • Changes to your staff’s tax codes or student loan status, which HMRC will send you through PAYE Online or your payroll software.
  • Changes to your staff’s pay or deductions, such as a pay rise, a bonus, a leave of absence, or a termination.
  • Changes to your business details, such as your name, address, contact details, or type of business.

You can report most changes by sending an updated FPS to HMRC, or by using HMRC’s online services3.

Conclusion

PAYE is a system of withholding and paying income tax and National Insurance for your employees. It helps you comply with your legal obligations as an employer, and ensures that your employees pay the right amount of tax and National Insurance throughout the year. To pay staff with PAYE, you need to register as an employer with HMRC, choose a payroll software, run your payroll, keep records, and report changes. You can find more information and guidance on how to pay staff with PAYE on HMRC’s website4.

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