Blogs

Payroll – PAYE 2nd July 2014

Posted in: Payroll

PAYE is a system by which tax and NI is deducted from employment income at source. PAYE schemes are operated by employers and HMRC use employers as unpaid tax collectors. If employers fail to properly operate PAYE then penalties are applied.

PAYE is applied at the time of payment. The date of payment is defined as the earlier of:

  • the time when payment is made; and
  • the time when the person is entitled to the payment

Different rules apply for directors. Directors are more likely to be in a position to influence when a payment is made. They can therefore manipulate the system to minimise their NI contributions. To avoid this, HMRC apply the annual earnings period to directors.

Whenever a director is paid, his/her total earnings to date in the tax year are compared to the annual earnings threshold and the upper earnings limit. This has the effect of calculating NI deductions on a cumulative basis for the tax year as a whole, rather than just the period (week or month) in which they are made.

What is PAYE income?

  • PAYE employment income;
  • PAYE pension income (payments by employers to former employees under pension schemes); and
  • PAYE social security income (statutory maternity pay and statutory sick pay)

PAYE employment income consists of:

  • taxable earnings from an employment; and
  • taxable specific income from an employment

This covers salaries, bonuses, round sum allowances, most cash payments and termination payments.

Some cash payments are not part of PAYE, for example cash payments for mileage allowances. Even if the payment is greater than the allowed 45p per mile the excess is not treated as PAYE, but is instead added to the P11D.

The general rule with PAYE is that if cash or a cash equivalent (e.g. listed shares) are given to an employee, then it should be treated under PAYE. If however an employee receives a benefit (not in cash or a cash equivalent) then the cost of that benefit is reported on the employee’s P11D.

Operation of PAYE

From 6 April 2013 the PAYE reporting system for PAYE was changed to Real Time Information (RTI). Under this system, the employer must send details to HMRC every time they pay an employee at the time they pay the employee. There is no longer the requirement to send end of year returns to HMRC showing payments made and deductions withheld.

Under RTI, payroll information must be submitted to HMRC on or before the day on which employees are paid.

This information is submitted electronically using a Full Payment Submission (FPS). It includes details of the amounts of PAYE income paid to the employee and deductions of income tax and NIC, as well as number of hours the employee normally works.

Once registered for PAYE, details must be sent for all employees, including those who earn less than the lower earnings limit for NIC purposes.

There is no requirement to register for PAYE if all employees earn below this limit, but if just a single employee earns at or above this limit then a PAYE scheme must be established and details of all employees must then be submitted.

The exceptions to this, the most important one being where the payment is in the form of a readily convertible asset. In this case, it may not be possible to include details on or before the payment date, however, details must be sent as soon as is reasonably practicable, but not later than the earlier of:

  • the time tax/NIC is deducted from the payment; and
  • 14 days after the end of the tax month in which payment is made (tax months finish on the 5th of every month).

If an employer does not pay any employees in a tax month, then an Employer Payment Summary (EPS) must be submitted rather than an FPS, indicating no payments have been made. The EPS must be submitted within 14 days of the end of the tax month.

Payment of PAYE

The tax and NIC must be paid on a monthly basis and is due 14 days after the end of the tax month of payment. However, where payment is made electronically, this is extended to the 22nd of each month (or the last working day prior to this unless paying by Faster Payment).

If the total tax and NI payable by the employer are less than £1,500 per month on average, then the employer can opt to pay quarterly. For this purpose, the 4 tax quarters end on 5th July, 5th October, 5th January and 5th April.

End of year returns

The employer still needs to provide all employees who earned at or above the NI lower earnings limit with a P60. This must be by no later than 31 May following the end of the tax year.

A P11D must be completed and submitted to HMRC for every higher paid employee (>= £8,500) who received benefits. For lower paid employees, form P9D must be used to summarise payments.

P11D and P9D must be submitted to HMRC by 6 July following the end of the tax year.

The employer also has to give a copy of the P11D to the employee by 6 July.

Leavers

When an employee leaves the employer includes the date of leaving on the FPS submitted when the final payment is made to the employee. The employer must give the employee a form P45.

The P45 contains details of pay and tax from the start of the tax year to the date the employee left. The P45 also contains the code number operated by the previous employer. This code number will generally be operated by the new employer until a new one is issued by HMRC.

The employee keeps part (1A) of the form gives the other parts (2 and 3) to the new employer. No part of the form is submitted to HMRC.

Starters

When an employer takes on a new employee, the employer must record certain information and submit it on the FPS when the employee is first paid. If the employee provides the employer with a form P45 the information can be obtained from here.

If the employee does not have a P45 the employer must obtain the information in another way.

Also, if the employee does not have a form P45 the employer must ask the employee to declare their employment situation when they join.

The employer must ask the employee which of the following applies:

  1. If this is their first job in the tax year and they have not received taxable benefits (such as job seekers allowance) or a pension.If this is the case, the employee will deduct tax on a cumulative basis.
  2. If they had another job in the tax year (or received taxable benefits) and that this is now their only job.If this is the case, the employer will use an emergency code and will deduct tax on a non-cumulative basis – that is, the employee will only be given a proportion of their personal allowance to set against income on a monthly basis.
  3. They have another job or receive a pension.If this applies, then the employer will operate code BR. This means that tax will be deducted from earnings at the basic rate of 20% without any personal allowances being given.

The above information is reported on the FPS when the employee is first paid.

Late payment of PAYE

Interest and penalties are applied where PAYE is paid late. An interest charge is made at the end of the end of the year for any late payment.

If tax has been overpaid, then repayment interest will be due to the employer.

Penalties are applied for late payment of PAYE and the amount charged depends on the number of late payments.

No. of defaults % of tax and NIC
1 to 3 1%
4 to 6 2%
7 to 9 3%
10 or more 4%

Additionally, if any tax or NIC is due more than 6 months late a further penalty of 5% is charged. If after 12 months, tax and NIC is still outstanding a further 5% will be added.

Late payment penalties must be paid within 30 days.

Late submission of returns for PAYE

There are penalties for the late submission of an FPS and for failure to submit P11Ds and P9Ds. How much you are charged depends on the number of employees you have.

No. of employees Penalty
1 to 9 £100
10 to 49 £200
50 to 249 £300
250 or more £400

Penalties for incorrect returns

Penalties are also applied for incorrect returns. The amount depends on the behaviour of the taxpayer and whether disclosure of the error was prompted or unprompted. The table below summaries the penalties:

Behaviour Maximum Penalty Min penalty with unprompted disclosure Min penalty with prompted disclosure
Deliberate and concealed 100% 30% 50%
Deliberate, not concealed 70% 20% 35%
Careless 30% 0% 15%