Employing people for the first time may mark an exciting moment in your business journey, signifying growth and the start of a workplace culture.
When done right it should increase your revenue and profits, but there is a lot to consider.
Continue reading for a clear guide on how you set up PAYE, what your tax obligations are, and what you need to do and report each month.
What is PAYE?
PAYE is how HMRC collects income tax from employees and pensioners, which they do automatically via a pay slip.
The system saves many people having to bother with completing a tax return, ensures their tax burden is spread evenly throughout the year and helps HMRC collect revenue more quickly and efficiently.
It’s not necessarily the biggest admin headache for employers, although there are still many benefits to outsourcing your payroll to an accountant.
Setting up PAYE
You might not realise it, but to set up PAYE, you first need to register as an employer with HMRC.
To register, you need a Government Gateway ID. It’s easy to get a Gateway ID if you don’t already have one for whatever reason.
Once you’re registered, it will take up to five working days for your registration to be processed. However, you must be registered before your first payday, so get everything done as soon as you can to ensure there are no issues.
You will also need payroll software to process it at your end. Most cloud accounting software packages, such as Xero and Sage, come with programmes to assist with payroll.
There are some free options if you don’t have the cash to invest right now, but they are unlikely to be as useful to you.
What does PAYE cover?
As we mentioned earlier, PAYE is used to collect income tax. In addition, National Insurance contributions (NICs) are calculated and paid via PAYE, where applicable, which your software should automatically do for you.
Your employee(s) will be liable for this if their wages exceed £12,570 a year – equivalent to £242 per week.
Although employers must also pay NICs where wages exceed £9,100 a year, there is an allowance available to small businesses that covers the first £5,000.
What do you need to record?
Whether you outsource payroll or not, it is your responsibility to keep records. These include:
- how much you pay each employee and the deductions you make
- the reports and payments you make to HMRC
- employee leave and sickness absence
- tax code notices
- taxable benefits or expenses
- charitable payments made through payroll (payroll giving).
All these records should be kept for three years after the end of the tax year they relate to.
What do you need to report?
You need to report employee payments and deductions on or before each payday. Separately, you’ll need to report any statutory pay if you wish to reclaim this from HMRC.
There are other things to report too, including when a new employee joins and if an employee’s relevant circumstances change (such as their becoming a director or reaching state pension age).
Expenses and benefits are reported annually at the end of the tax year.
Help with PAYE
With the help of software PAYE is not that hard to do, but for many it makes sense to outsource it so you can concentrate on core activities while ensuring compliance.
If you would like help with PAYE and payroll, don’t hesitate to get in touch.