How to Set Up PAYE Scheme for your Company
If you have started running your own business that employs staff to carry out work for you in exchange for salary and benefits, then you need to register as an employer to HM Revenue and Customs (HMRC).
As an employer, you have a responsibility to ensure that certain statutory deductions are correctly calculated and taken out of the wages given to your employees.
Therefore, you need to operate PAYE scheme as part of your payroll.
What is PAYE?
PAYE stands for Pay as You Earn. PAYE is a system that allows you to withhold income tax and national insurance each time you pay your employees. As an employer, you are responsible for reporting these statutory deductions to HMRC through payroll filings known as Full Payment Submission (FPS).
Setting Up PAYE
If you’re running payroll yourself, you may register as an employer online. The registration should be prior to your first pay day. When a payroll service bureau manages your payroll, they can do the registration on your behalf.
The information needed when registering is:
- Company name
- Company unique taxpayer reference (UTR)
- Nature of the business
- Business address
- Company registration number (CRN)
- First payday
- Number of employees you employ
- Full name and national insurance number of company director
Once the registration is completed, HMRC will generate your PAYE reference and Accounts Office Reference which usually take 5 working days. The references will be sent via post to your business address.
In case the registration is after your first pay day, you can still run your payroll without these references but you need to hold off submitting your payroll filings. Then you must report late filing FPS once this information is available.
What are PAYE deductions?
PAYE deductions comprise of Income Tax, National Insurance and Student Loan. These are the items that are taken directly from employees’ gross income prior to paying employees’ wages or pensions which needs to be reported and paid to HMRC.
How does PAYE works?
In the PAYE scheme, employees are deducted for income tax. Income tax amount varies depending on an employee’s gross income and tax code.
Your employees’ tax code plays a major role in how income tax is calculated from your employees’ pay as the tax code will specify how much personal allowance each employee has.
Personal allowance is the amount of income that is tax-free. Employees will start paying tax once they earn more than their personal allowance.
HMRC will issue the tax code for your employees but employees can verify with HMRC if they think that they tax code is incorrect.
When and How to Report PAYE deductions?
PAYE deductions must be reported on or before your pay date through payroll Full Payment Submission filing. The reporting depends on the payroll frequency you use in paying your employees (e.g. monthly, weekly, annually).
In case your company is eligible to claim a reduction on the amount you owe to HMRC such as employment allowance or statutory payments, PAYE allows you to do so and this is submitted through payroll Employer Payment Summary (EPS) filing.
If you failed to report your payroll FPS, you need to submit a “Late FPS Filing”.
Be mindful of the submission deadline as it is not good practice to submit your filings late as this may result in HMRC fines or penalties.
When and How to Pay PAYE deductions?
The total amount of income tax and national insurance (for both employees and employers) and student loan less any claim reduction is commonly known as your “PAYE Bill” or “HMRC Payment”.
You must pay what you owe to HMRC by:
- The 22nd of the next tax month if you pay monthly- for example, if you run the April payroll your due date of payment is the 22nd of May.
- The 22nd after the end of the quarter if you pay quarterly – for example, 22nd of July for the 6th of April to the 5th July quarter.
You can pay your PAYE bill electronically or by cheque through the post but you can no longer pay directly at the Post Office.
Note when paying your PAYE bill, you need to include the payroll reference which is your Accounts Office Reference and the tax period number. This will ensure the payment is allocated correctly.
Having the PAYE scheme as part of your payroll gives you a clear process of how you can report statutory deductions to HMRC. It also benefits your employees as instead of them paying a lump sum of money that they owe to HMRC at the end of the year, this is already taken care of.