Employment Tax PAYE Compliance

PAYE stands for Pay As You Earn. It is the system employers use to deduct income tax and National Insurance contributions (NICs) from their employees’ pay as it is earned. All employers must register with HMRC and set up a PAYE scheme. Each time you run your payroll, you calculate the tax and NICs due based on your employees’ earnings in that pay period. You deduct this from their gross pay and pay the net amount to the employee. You then report your payroll information to HMRC on or before payday through your payroll software or HMRC’s online PAYE for employers service. This ensures the correct tax and NICs are paid throughout the year.

If you pay your employees monthly, you need to report and pay their income tax and NIC deductions to HMRC on or before the date you actually pay your staff, which is usually the last working day of the month. For weekly payrolls, you need to report to HMRC each week, on or before the Friday after the week end date.

If you pay quarterly, the deadlines are:

• 5th of July for pay from 6th April to 5th July
• 5th of October for pay from 6th July to 5th October
• 5th of January for pay from 6th October to 5th January
• 5th of April for pay from 6th January to 5th April

You can report payroll information through payroll software or HMRC’s free Basic PAYE Tools. Talk to your accountant if unsure.

You must keep detailed records for each employee including their:

• Copy of ID, Proof of Address and their status to work in UK
• Pay – gross wage, deductions, overtime, bonuses, expenses etc
• Tax code
• National Insurance number and contribution categories
• Start and leave dates
• Details of any company benefits provided
• Sickness, maternity/paternity leave and pay information
• Student loan deductions if applicable

In addition, you must keep records of your payroll processes including deductions worked out, correspondence with HMRC, and amended tax codes. These records must be kept for 6 complete tax years after the end of the tax year they relate to.

Some common tax-free employee benefits and allowable expenses include:

• Pension contributions – within annual and lifetime allowance limits
• Childcare vouchers – up to £55 per week tax-free
• Cycle to work scheme – save 25-39% on a new bike and accessories
• Trivial benefits like small gifts, parties, flowers – up to £50 per gift
• Mileage allowance – 45p per mile for first 10,000 miles

There are rules around the amount that can be provided tax-free for many benefits. Talk to your accountant or HMRC about allowable expenses and benefit amounts.

There are several factors to consider:

• Control – the more control you have over what, how, when and where they work indicates employee status
• Substitution – if they can send someone else to do the work, this indicates self-employed
• Financial risk – who shoulders risk and provides equipment indicates status
• Intention and mutuality of obligation – is there an intention to create a contract of employment and ongoing obligation for you to provide work/pay? This points to employee status.

HMRC provides an online employment status checker tool you can use to help determine status. If in doubt, seek professional advice as incorrect status could lead to penalties.

If you hire independent contractors, you may need to operate PAYE and deduct income tax and NICs if they are inside IR35 rules. If not, they are responsible for paying their own income tax and NICs. For freelancers, you must check if PAYE needs operating or if they pay self-employed tax.

Even if freelancers or contractors pay their own tax, you are still responsible for paying employer’s NICs on their earnings over £190 a week. Talk to our tax advisors about contractor taxes to remain compliant. 

As an employer, you are usually responsible for paying:

• Statutory Sick Pay (SSP) – up to 28 weeks at £99.35 (2022/23 rate) per week
• Statutory Maternity Pay (SMP) – up to 39 weeks at 90% then 33 weeks at £156.66 (2022/23 lower rate)
• Statutory Paternity Pay (SPP) – 1 or 2 weeks at £156.66 (2022/23 rate)
• Statutory Adoption Pay (SAP) – up to 39 weeks at 90% then 33 weeks at £156.66 (2022/23 lower rate)

Tax and NICs are not deducted from these statutory payments. You can recover some costs – talk to your payroll provider. Check GOV.UK for the latest rates, eligibility, and process guidance.