Pay as you earn, more commonly known as PAYE, is the easiest way for you to pay Income Tax and National Insurance contributions for your business. You’ll deduct these contributions from your employees’ wages and it’s your responsibility as their employer to make sure the tax gets paid.
You don’t need to pay self-employed workers through PAYE, and, if none of your employees are paid more than £113 a week, have a pension or a second job, and they don’t get expenses or benefits, then you won’t need to register for pay as you earn. However, you will still need to keep accurate payroll records for them and if they ask, you need to provide them with a pension scheme, but you won’t need to contribute anything towards it yourself until they start earning over £113 a week.
It’s these records with payroll that help you to correctly pay the right tax for your employees. There are different ways that you can run your payroll in your business. You can either hire a payroll provider to run it for you, or you can take control yourself and use a payroll software in your business. Take the time to consider which option is best for you and keep in mind the other responsibilities you have in both your business and personal life. If you don’t have the capacity to maintain accurate records yourself, you should seriously consider hiring a specialist to do it for you.
Pay as you earn (PAYE) and payroll providers
If you decide that you don’t want to handle PAYE yourself, you can hire a professional to run it for you. Different providers offer different services, so you’ll need to do some research and find the best provider for your business and your budget. An accountant may be able to offer you this service, or you can find an independent provider.
You will still need to keep records about your employees yourself however, and share them with your payroll provider. They’ll always need to have the most up-to-date information about your employees so they can make sure they’re paying the right Income Tax and National Insurance contributions.
Pay as you earn (PAYE) and running payroll yourself
If you decide to run your payroll yourself, there are a number of different tasks that you’ll need to tick off your list:
Register as an employer with HMRC (if you haven’t already)
Before you can start updating employee records and setting up your payroll, you’ll need to make sure that you’re registered as an employer with HMRC. You can do this really easily online. Just make sure your employee is registered before their first payday rolls around.
Sign up for PAYE online
Once you’ve registered as an employer, you can get your PAYE account set up so you can pay your employees for all the hard work they put in to your business.
You can use your PAYE online account to send payroll reports directly to HMRC, access your employee’s tax codes and notices, get alerts from HMRC about your reports and payments, and, if necessary, appeal a penalty.
Choose your payroll software
There are lots of different options available to you and you’ll need to do some research before committing to a payroll software. HMRC have tested free payroll software you can use if you have fewer than 10 employees, as well as paid-for software for businesses with over 10 members of staff, but there are many options available to you.
The free PAYE tool that HMRC point you towards is great, but it’s important to note that it doesn’t account for auto enrolment duties. So, make sure you understand what your responsibilities are for your staff regarding their pensions. To help make it a bit easier, we’ve created a free guide to auto enrolment that you can access here.
When choosing your payroll software, you’ll might want to think first about what you actually need it to do for you, as that will affect the price you’ll be paying for it. Do you need your software to be able to:
- Produce payslips
- Record pension deductions and comply with auto enrolment
- Make pension payments
- Pay different people at different times (i.e. weekly and monthly payments)
- Send updated reports to HMRC
You need to keep records for up to three years after that tax year has ended, in case any issues come up later down the line. You’ll need to record:
- What you pay your employees and any deductions you make
- Any payments you make to HMRC
- Employee leave and sickness absences
- Tax code notices
- Taxable expenses or benefits
- Payroll Giving Scheme documents if they apply to your business
Tell HMRC about your employees
Every time a new employee joins your business, you’ll need to update HMRC and your Pay As You Earn online account so that both you and your new team member will receive and make the right payments. To register your employee, you’ll need to fill out what’s called a Full Payment Submission for the first time you pay them. You submit this using your payroll software and you need lots of information to hand to be able to fill out the form, much of which you’ll be able to learn from their P45 from their previous employment. You’ll need your employee’s:
- Full name
- Date of birth
- Full address
- National Insurance Number
- Tax code
- Starter declaration
- Start date for their new position with you
- Leaving date from their last job
- Total pay and tax paid to date for the current tax year
- Qualifying deductions for student loans and National Insurance
- Make sure that your new employee is fully registered before their first payday.
Once you’ve completed all these steps, you’ll be ready to pay whatever tax and National Insurance your business and employees owe to HMRC.