If you have decided to take the step and employ a member of staff, or have decided that as a Director of the company, you would like to be a salaried, employed member of staff, then PAYE is something you will need to learn about.This is our guide to PAYE in the UK, what it is, and what you need to know as an employer.What is PAYE?Pay As You Earn or PAYE, is the income tax that is deducted from a salary before it is received. The HMRC is paid this tax prior to the employee receiving it, and as an employer, you must make this payment directly.When you become an employer, you, or your accountant, will need to register you as an employer with the HMRC, where you can notify HMRC of any new starters, changes to employees, and manage payments.How to payThe PAYE payments will need to be made monthly, but if you are a small employer and only expect to pay up to £1,500 per month, then you can arrange a quarterly payment, if you feel this is more suited to your budgeting and financials.As an employer, you’re legally responsible for completing all PAYE tasks - even if you pay someone else to do them.How is PAYE Calculated?PAYE is calculated based on how much the employee earns, and whether they are eligible for a personal allowance, which is the amount that is able to be earned tax free each year, and this can change annually - in 2020-21 this is £12,500 per year.Above this personal allowance, employees are charged tax at 20%, 40% or 45% depending on whether they are a basic rate, higher rate, or additional rate tax payer, which is based upon annual income.Reporting PAYE to HMRC If you run payroll yourself, you’ll need to report your employees’ payments and deductions to HMRC on or before each payday.If you use a payroll software, such as Xero, then this software will work out how much tax and National Insurance you owe, including an employer’s National Insurance contribution on each employee’s earnings above £169 a week.You’ll need to send another report to claim any reduction on what you owe HMRC, for example for statutory pay.
