PAYE, what you need to know

In Accountancy by Caroline

The Office of Tax Simplification (OTS) published a scoping review in July 2018 of the Pay as You Earn PAYE) system. They set out to make sure that businesses or their agents can ‘see relevant client information’ and ‘access a number of key services’.

How the PAYE system operates

PAYE is a system of paying employees that enables the employer to deduct income tax, national insurance and student load repayments directly from wages. The amounts deducted are based on the PAYE tax codes and HMRC procedures relevant to the employee.

The PAYE system is mandatory as part of an employers payroll process. Under some circumstances, for example if none of the employees are paid £118 or more per week, receive benefits or a pension then the employer may not need to register for PAYE.

What is real time information (RTI)?

The PAYE system requires that employers report on each pay period in real time. These submissions include all payments and deductions made from employees each time a payment is made. The two types of returns are Full Payment Submission (FPS) and an Employer Payment Summary (EPS). The FPS is filed on or before the date employees are paid and must include everyone even if they are paid less than £118 per week.

In some situations, an employer will submit an EPS.

Certain situations require employers to submit an EPS to notify of instances where other payments or receipts can be offset against the amount due from the FPS. These include:

  • Times when no employees were paid in the tax month
  • Situations where statutory payments are recoverable e.g Shared Parental Pay)
  • Where CIS (Construction Industry Scheme) deductions are paid (applies to companies only)

The EPS must be submitted by the employer to HMRC by the 19th of the month for it to be offset against the previous tax month’s payment.

New businesses and PAYE

When setting up new businesses, as soon as employees are taken on, the employer must set up a PAYE scheme with HMRC. Guidance and tools are provided to help employers to calculate the amount of tax and NICs due. Alternatively, many businesses use accounting software with payroll functionality to streamline the process and automate the RTI reporting. Systems such as Xero and Sage One have this service available. Alternatively, our payroll bureau can handle all of this for you for a very reasonable cost, saving you time and letting you focus on your business.

Being on top of the reporting requirements and making the correct payments is vital to avoid HMRC penalties. You could be liable for a penalty if your FPS is filed late; if you failed to send the correct number of FPSs; or if you failed to send an EPS when you didn’t pay any employees in a tax month.

Payroll can be a complicated area of business management so for any advice or to enquire about our payroll service, please get in touch.