PAYE is the system that HM Revenue and Customs (HMRC) uses to collect Income Tax and National Insurance (NI) from employees.
When you employ staff you’ll make payments to them. These include salary as well as tips, bonuses and statutory sick or maternity leave pay. From this you’ll make deductions for tax, NI, student loan repayments or pension contributions.
Reporting pay and deductions
Your employees’ payments and deductions will need to be reported to HMRC on or before each pay day. This is known as Real Time Information (RTI) and has to be done via a Full Payment Submission (FPS). You will need to use payroll software to submit a FPS.
The software will work out how much tax and NI you owe, including your employer’s NI contributions which you must pay on employee’s earnings above £155 a week.
You will also need to send a final payroll report each year at the end of the tax year (5 April).
Keeping payroll records
Even if your staff earn less than £155 a week, making you exempt from PAYE, you still need to keep payroll records.
You must collect and keep records of:
- what you pay your employees and the deductions you make
- reports and payments you make to HM Revenue and Customs (HMRC)
- employee leave and sickness absences
- tax code notices
- taxable expenses or benefits
- Payroll Giving Scheme documents, including the agency contract and employee authorisation forms.
Your records need to show that you’ve reported to HMRC and it may check your records to make sure you’re paying the right amount of tax. You need to keep these records for three years from the end of the tax year they relate to.
Changes in circumstances
You will need to tell HMRC is there is a change in circumstances ie when an new employee joins or if an employee’s circumstances changes, for example, they reach State Pension age.