The Basics of PAYE (Pay As You Earn)

PAYE or Pay As You Earn Scheme is HM Revenue and Customs’ (HMRC) system to collect Income Tax and National Insurance from employment in UK.
Any business which intend to employ staff under Employment Contract (written or verbal agreement) needs to register for PAYE scheme before preparing the first payslips for their employees. They need to deduct Income Tax and National Insurance Contributions from their employee’s wages and pay it to HM Revenue & Customs.
You can become an Employer and apply for a PAYE scheme if you fall into one of the following categories:

  • You are a Limited Company that employs staff with earning more than £118.00 per week
  • You are a Limited Company and want to employ yourself as Director
  • You are Self-Employed or Construction Worker who wants to employ team workers
  • You are planning to employ staff for personal use (nanny, cleaner, housekeeper, gardener, private chauffeur, etc.)

PAYE or Payroll can be reported to HM Revenue on a weekly, fortnightly or monthly basis using a Certified Payroll software. The submission is called RTI (Real Time Information) and has to be done each time you pay your staff.
As employee you are paying 2 type of taxes:

  • Income tax which is calculated at 3 rates:
  • English, Welsh and Northern Irish basic tax rate – 20% on annual earnings above the PAYE tax threshold and up to £37,500. PAYE tax threshold also known as Employee Personal Allowance is currently £12,500.00 per annum. The Personal Allowance is increasing every year in April according with the Government Budget.
  • English, Welsh and Northern Irish higher tax rate – 40% on annual earnings from £37,501 to £150,000
  • English, Welsh and Northern Irish additional tax rate – 45% on annual earnings above £150,000

If you live in Scotland, note that Scotland operate different tax rates:

  • Scottish starter tax rate – 19% on annual earnings above the PAYE tax threshold and up to £2,049.
  • Scottish basic tax rate – 20% on annual earnings from £2,050 to £12,444.
  • Scottish intermediate tax rate – 21% on annual earnings from £12,445 to £30,930.
  • Scottish higher tax rate – 41% on annual earnings from £30,931 to £150,000
  • Scottish top tax rate – 41% on annual earnings from £30,931 to £150,000

 

  • Employee’s National Insurance contribution also known as Class 1 National Insurance (Primary) is calculated as below:
  • 0% on earnings below £8,632 per year or £719.00 per month
  • 12% on earnings between £8,632 per year and £50,000 per year
  • Additional 2% on earnings above £50,000 per year

As an Employer you are responsible to pay the Employer (secondary) contribution rates, this is added to your PAYE tax bill as following:

  • 0% on earnings below £8,632 per year or £719.00 per month
  • 8 % on earnings above £8,632 per year

Employers can apply for Employment Allowance which was introduced in April 2014, for the purpose of supporting businesses and charities in helping them to grow by cutting the cost of employment. Eligible employers can claim the allowance, which reduces their Employer NICs bill by up to £3,000 a year.

Always remember to pay your employees at least the National Minimum Wage
These rates are for the National Living Wage and the National Minimum Wage. The rates change every April.

Year 25 and over 21 to 24 18 to 20 Under 18   *Apprentice
April 2019              £8.21 £7.70 £6.15 £4.35          £3.90

*This rate is for apprentices aged 16 to 18 and those aged 19 or over who are in their first year. All other apprentices are entitled to the National Minimum Wage for their age
Paying the PAYE and NI Contributions
Your duty as employer is to make sure that you are up to date with the Contribution payments. The deadline for PAYE taxes is always by the 22nd of the following tax month. You may have to pay interest and penalties if your payment is late.
You can pay your PAYE bill online via HMRC’s website, by debit or corporate credit card, Bacs or at your bank or building society (cash or cheque).



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