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Q&A: PAYE

Q. I have recently started my business and I am in the process of hiring staff, what should I know about PAYE?

A. Pay As You Earn (PAYE) is the way that HMRC collects income tax and national insurance. As an employer once you start hiring people you have a legal obligation to collect PAYE from all payments that you make to your employees who earn above the national insurance lower earnings limit which is £97 per week, £421 a month or £5,044 a year. The first thing that you have to do is to register as an employer with the Inland Revenue. This is a fairly straightforward process and can be done online. You will need to provide information such as the name of the business, a registered address, the number of employees and you will also have to mention who is in charge. Once you actually hire staff you need to ensure that you get their P45, which they should have received when they left their previous employer. If a staff member has not worked before then you can register them with HMRC. The P45 includes the employee’s PAYE code and the amount of tax and national insurance they have to pay, so it’s important that you receive this to speed up the process of getting people on the payroll. Victoria Goode, employment specialist lawyer at law firm Lewis Silkin, says that once the employer has collected the tax contributions from staff they then need to transfer it to HMRC. When you transfer the money depends on when you pay your staff. So if you pay your staff monthly then you pay HMRC monthly. “You have 14 days after the end of the tax month, which is the sixth day of each month, to pay HMRC.” And don’t expect the HMRC to tolerate lateness. They aren’t very good at forgiving mistakes either, says Goode, and they can charge fines or demand interest for any payments that are overdue.

Q. What should I do if I pay my staff benefits on top of their salary?

A. You pay national insurance and income tax on salary, overtime, bonuses and commission. Everything else is considered as non-cash payments, for example car allowances, healthcare, vouchers etc. You don’t have to pay PAYE on those benefits, however they are liable for tax – to be paid by the employee – and national insurance – to be paid by the employer. Goode says that these non-cash payments need to be counted up and reported to the revenue at the end of each year. To report these payments the employer will need to fill in a P11D form. The employer is then liable to pay 12.8 per cent (the national insurance rate) on the total amount. So, for example, if you offer your staff Bupa healthcare and the total bill for the Bupa services was £800 over the year then the employer would have to report it on the P11D form and then pay £100 to the Revenue in national insurance contributions. Another thing that employers need to consider is if they give their staff any stock options. As long as the company is not going to be sold or floated in the near future then all employees, effectively, have a tax-free allowance of £120,000 worth of stock. If this is not the case, or the amount of stock is more than that, then it is treated like income.