Pay As You Earn Wages And Salaries Tax Scheme Explained

PAYE is the common abbreviation for the Pay Asessential function of payroll software that many
You Earn scheme that was first introduced by the UKemployers adopt to ensure accuracy and compliance
in 1944 as a tax system by the inland revenue whichwith the regulatory bodies tax rules.
employers administer to deduct from employeesThe second major area of PAYE administration is for
wages and salaries income tax and national insuranceemployees to deduct national insurance contributions
contributions and account for the employers nationalfrom employees. National insurance contributions are
insurance contributions. Although strictly speaking notcalculated not on a cumulative basis as income tax but
part of the PAYE scheme employers also use theare calculated according to the gross income earned in
pay as you earn framework and documents toa specific pay period based upon the gross pay during
administer other deductions.that weekly or monthly pay period.
Every employer in the UK must register as anThe amount of national insurance deducted is
employer with the tax authority. Register to administerdetermined by looking up the employee gross pay on
a PAYE scheme is obligatory if the employee hasa national insurance deductions table. A different
other paid employment or has earnings at or abovenational insurance table is applied according to the
the PAYE threshold and liable for deductions ofpersonal circumstances of the employee. In addition to
income tax, or has earnings at or above the nationalthe employee national insurance contribution each
insurance lower earnings level. Registration can takeemployer also has to pay an employer national
place up to four weeks before the first qualifyinginsurance contribution.
employee is engaged.PAYE administration is a series of payroll and
The Paye system is a scheme whereby employeesdeductions documentation related to the payment of
are deducted income tax and national insurance on awages and salaries to employees. The majority of
weekly or monthly basis according to the frequency ofbusinesses use payroll software to automate the
wage and salary payments by the employer who thencalculations and produce the information required for
pays the income tax and national insurancethe PAYE returns.
contributions over to the inland revenue in the UK eachThe starting point of the PAYE system is the P45
month.which all employees receive when they leave an
The employer is also responsible for keeping a recordemployment and is a certificate of the cumulative
of the employers national insurance contributions whichgross pay and income tax deducted up to the date of
together with the employee deductions are paid overthe P45. Details from the P45 also include the
to the tax authority on or before the 19th of the monthemployee tax code that must be entered into the
following the pay period. Small business that has aemployee PAYE records to enable the new employer
quarterly liability to income tax and national insuranceto calculate the income tax due to date.
less than 1,500 pounds per quarter can arrange to payIf an employee does not hand the new employer a
the PAYE every three months rather than everyP45 then they are taxed on a week to week basis
month.until the tax code and cumulative income tax position
PAYE administration involves the calculation of incomeare known. Confirmation of an employee tax position is
tax using a tax code system. Each employee isobtained by the new employer by submitting a P46
allocated a tax code which consists of a number equalform to the Inland Revenue when an employee does
to approximately one tenth of the personal taxnot have a P45.
allowance as adjusted by the employee personal taxHaving engaged an employee and deducted income
adjustments. Special conditions and circumstances fortax and national insurance contributions the employee
each employee is usually representing in the tax codemust receive a payslip from the employer showing the
with a letter known as a suffix to the prefix tax codegross pay, deductions and net pay. In additional the
number.employer also needs to maintain records of payments
The financial tax year in the UK is from 6 April oneto the employee and deductions made. Payroll
year to 5 April the following year with each tax yearsoftware can produce these records and the Inland
divided into 53 specific week numbers that accountsRevenue also provide small employers with a P11
for days over at the end of the year and also into 12deductions working paper for this purpose.
monthly periods. Income tax deducted is calculated byAt the end of the financial tax year for payroll three
the employer operating the PAYE scheme on amain PAYE documents are required to be completed
cumulative basis during the tax year by using eitherby each employer. Each employee has to be given a
manual tax tables or a payroll software package. TheP60 certificate of earnings and deductions during the
tax table is arranged to determine the tax freefinancial year. The P60 is an important document and
allowance each pay week or month during the yearoften required for many diverse purposes
according to the employee tax code.unconnected with the PAYE system such as future
To calculate the income tax the employer determinesmortgage applications and other purposes as proof of
the cumulative tax free allowance in a specific weekincome.
or month and deducts this allowance from theThe employer also has to complete a P14 for each
cumulative gross pay that employee is due at that taxemployee which is the form on which the employee
week including current wages or salary and alldeductions and statutory payments are recorded. The
previous income earned during the current tax yearP14 is sent to the Inland Revenue.
including any earnings from other employers. HavingIn addition every employer also has to complete a P35
established the taxable pay that amount is then appliedwhich is the Annual Employers Return which lists the
to the percentage of income tax to be paid under thename of every employee, the income tax deducted
current tax rules for that financial year.and national insurance liability including employee and
The employer is responsible for deducting the correctemployer contributions. The P35 also includes statutory
amount of income tax, issuing the employee a payslippayments made to employees and the amount of the
to advise the income tax deducted and also for payingemployer has already paid to the Inland Revenue. In
the income tax deducted to the tax authority. Thethe UK employers can receive a tax free bonus for
PAYE calculations and production of payslips is anfiling the P35 details online.