An Overview of PAYE for Small Businesses

small business

Many budding entrepreneurs face the reality early on in their business careers of having to deal with the various elements of running a business, outside of the areas that they’re used to. One such area is in finance. Such is the complexity and importance of getting your accounts right, most sensible small business owners will seek out a good accountant, before even thinking of taking on their first employees and growing their business.

One such financial requirement on UK businesses with employees is HMRC’s system of paying employee’s tax, known as Pay as you Earn or PAYE. In this article I’d like to go over some of the fundamentals of this system, but let’s start with looking at what it means to take on an employee.

Employer’s Responsibility

Taking on employees is a big step for any business and one that requires careful consideration, both in terms of the candidate and your ongoing responsibilities to them as an employer. Perhaps the most fundamental responsibility you have to them is to pay them regularly and on time. Paying your employees also means paying their income tax and National Insurance contributions (NIC) through PAYE.

As of the tax year 2016/17 if your employees earn more than £5,824 in a year then they will be liable for NIC, meaning you will have to pay this for them to HMRC through PAYE. If they earn more than £11,000 in a year (£212 per week or £917 per month) then you will also need to pay their income tax through PAYE as well.

What Else does PAYE Apply to?

As discussed PAYE includes salary or wages of all employees but it also covers overtime, shift pay and tips, even if those tips are paid in cash (although you don’t have to pay NIC on these).

Bonuses and commissions are also liable to tax and therefore covered by PAYE, as are some expenses and benefits, statutory sick pay, maternity or paternity pay and compensation payments such as redundancy pay-outs. Expenses and benefits in particular can be particularly complex and won’t always be covered by PAYE. It’s important to know what these are and how you pay tax on them.

PAYE is also used to collect payments from your employee’s salary for things like pension contributions, student and employee loan repayments.

Reporting PAYE to HMRC

Setting up and administering PAYE is not a straightforward affair and with a small team of employees many businesses opt to outsource their payroll function.

The first thing you’ll need to do when you take on an employee is register as an employer with HMRC. It’s then advisable to use some accounting software with payroll functionality, which will calculate PAYE for each employee for you. This makes it easier than it sounds and the payroll software you use is only as good as the person who’s inputting the data into it so make sure you check and double check your figures.

If your employees’ income tax and NIC (and this includes sub-contractors incidentally) average over £1500 per month then you’ll need to submit PAYE payments monthly to HMRC. If it’s less then you can pay quarterly.

Employees must also be kept informed of how much tax and NI they’ve paid through their payslips and as an employer you must provide them with a P60 at the end of the tax year (5th April) detailing gross and net income and all tax paid. Employers must also send HMRC an Employer Annual Return (P35 or P14) for that tax year no later than 19th May.

About the Author: Richard Symonds is the director and founder of Bristol based Trust Local and has been helping create growth opportunities local businesses since 2011. Richard has years of experience helping companies across a range of sectors build networks and establish trust amongst their customer base. You can connect with him on Twitter, Facebook or LinkedIn.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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