Pay as your Earn (PAYE) – simple right? You get your payslip each month and your tax has magically been paid to the government. Not so - for Limited Company owners; paying PAYE can be a minefield.
If you’re a sole trader you don’t need to worry about PAYE – all your tax is sorted out in your tax return at the end of the tax year.
If you’ve just started a Limited Company or are thinking of setting up as Limited, you’ll need to sort out your PAYE through your company.
So, the basics. Well – it’s always best to start with a definition – Pay as you Easy (PAYE) is the method of paying Income tax and National Insurance (NI) to the government. Every employee in the UK has to pay tax out of their wages. The amount of PAYE paid to the government out of a person’s wages will depend on how much they earn.
Here’s the more complicated bit...if you own your own Limited Company, YOU are an employee of that Limited Company therefore YOU, the Director, will need to pay PAYE from your wages (only your salary not dividends, there isn't any NI on dividends). If you have other employees, PAYE will also need to be paid from their wages.
Here’s a little example to illustrate:
Ted’s Engineer’s Limited (company name)
Ted Jones (The Company Director and owner of Ted’s Engineer’s Limited)
Ted’s Engineer’s Limited has four employees including Ted as the Director.
Ted pays himself and his three employees a monthly salary (Ted also receives dividends when the company makes profits). PAYE needs to be taken from these salaries and paid to the government (Her Majesty’s Revenue and Customs; HMRC). The employee’s themselves don’t pay PAYE, the company manages their PAYE on their behalf. Ted Jones and his three employees receive payslips where the amount of tax is shown and deducted.
Okay – so where is this PAYE money kept? Well, the PAYE from Ted and his three employees is kept within Ted’s Engineer’s Limited business bank account until it’s declared and paid to HMRC (more on how to pay PAYE later).
Hopefully we’ve simplified what PAYE is and how it’s managed. If you’ve just started a Limited Company, below is a quick step guide to setting up PAYE within your company. If at any point you’re confused – we’re happy to help. Ask us a question or give us a call on 0500 234111 / 01442 275767.
New to PAYE?
Are you a new Company owner? If you’ve just registered your Limited Company you’ll need to start thinking about setting up your PAYE system for yourself and other employees (if you have any). Here’s our simple step-by-step guide to sorting out PAYE for your company:
1. Register with HMRC – fill out some details online and you’ll be set up with HMRC. You’ll need to know the number of employees you have (including yourself), the frequency of PAYE payments to be made to HMRC and when your first pay date will be.
2. Set up a payroll system – this system logs all your employee’s details and will work out how much PAYE you’ll need to deduct from employees pay each month. You can buy software and set up a payroll system yourself however, tax is complicated and there are likely to be unforeseen problems. We’d always recommend hiring an accountant to run your payroll.
3. Obtain employee’s P45’s – to accurately work out PAYE deductions. If you’re running payroll yourself, enter employee’s details from their P45 into the software. This will give you a tax code that will tell you exactly how much to deduct from employee’s salaries. If you’re getting an accountant to run payroll, hand them the P45’s and they’ll work out deductions and supply you with payslips. In the absence of a P45 you should arrange for a P46 to be completed.
4. Send payslips – deduct the right amount of tax and declare this on a payslip for your employees. Payslips are a statutory requirement
5. Pay PAYE to HMRC – After you’ve paid your employees, the amount deducted stays within your company until it is declared and paid to HMRC. You’ll need to pay the money over to HMRC online. Make sure you transfer the PAYE payment to HMRC by the 19th of the next month otherwise you might incur heavy fines.
6. More employees? – If you hire more employees in the future, make sure you get their P45 (and/or P46) and input their details into your payroll system. Your accountant can help you with this.
The new rules...
The new PAYE rules will come into play next tax year i.e. after April 2010. These rules apply to everyone who make PAYE payments – every employer in the UK.
The main changes to PAYE are as follows:
You’ll be charged a penalty if more than one payment is late in a year. For the first late payment – there is no penalty (as long as this is paid up to 6 months after it’s due date). If more than one payment is late in a year, you’ll pay a minimum of 5% of the value of the payment on top of what you owe.
The percentage extra you are charged will depend upon how late your payments are – the longer you leave it, the more you’ll have to pay back.
If you are new to PAYE, make sure you speak to your accountant. They can advise on the best payroll system to use and set you up with HMRC. If you haven’t yet got an accountant or would like to talk more about PAYE or payroll, give us a call on 0500 234111 / 01442 275767 or ask us a question.
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- VAT and NI - how do VAT and NI affect you as a freelancer?
- Freelancer Insurances - what insurances do you need as a freelancer?
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