Paying PAYE tax Tax

Pay as your Earn (PAYE tax) – 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 tax can be a minefield.

If you’re a sole trader you don’t need to worry about PAYE tax tax – 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 tax tax through your company.

So, the basics. Well – it’s always best to start with a definition – Pay as you Easy (PAYE tax) 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 tax tax 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 tax from your wages (only your salary not dividends, there isn't any NI on dividends). If you have other employees, PAYE tax 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 tax tax 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 tax tax, the company manages their PAYE tax tax 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 tax money kept? Well, the PAYE tax 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 tax later).

Hopefully we’ve simplified what PAYE tax is and how it’s managed. If you’ve just started a Limited Company, below is a quick step guide to setting up PAYE tax 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 234 111 / 01442 275 767.

New to PAYE tax?

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 tax system for yourself and other employees (if you have any). Here’s our simple step-by-step guide to sorting out PAYE tax 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 tax 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 tax 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 tax 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 tax 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 tax 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 tax rules will come into play next tax year i.e. after April 2010. These rules apply to everyone who make PAYE tax payments – every employer in the UK.

The main changes to PAYE tax 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 tax, 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 tax or payroll, give us a call on 0500 234111 / 01442 275767, or ask us a question.

You may find these other pages useful:

• Benefits of Freelancing - the benefits to you as a freelancer and to your potential clients
• Freelancing Part Time - can you freelance whilst still in your permanent role?
• Sole Trader or Limited? - which route is right for you?
• Setting up as a Sole Trader Freelancer - what you need to consider when setting up as a freelancer
• VAT and NI - how do VAT and NI affect you as a freelancer?
• Finding freelance work - worried about finding freelance work? Some helpful tips here
• Freelancer Take Home Pay Calculator - how much more could you earn by going freelancing?

Easy Accountancy

Easy Accountancy is the UK’s only national specialist accountancy firm for freelancers, sole traders and small businesses

If you’ve just started out as a freelancer or run a small business, you’ll definitely need a small accountant and there are plenty of options out there! However, most accountants will charge you every time you get in touch with them; for every phone call, email or meeting.

We don’t want our clients to be scared to contact us and potentially lose out on valuable tax saving advice. It's even more important when you first start out as you really need to set your business up in the best way possible. As a start up you’ll probably have loads of questions and will really appreciate the fact you can call your accountant as many times as you like without the fear of racking up large bills.

Our low cost, all-inclusive fixed-fee accountancy service includes unlimited access to your own accountant throughout the year, so you never need to worry about picking up the phone and then receiving a bill afterwards for the privilege, and covers all your business and personal tax affairs needs. All clients additionally receive:

• Help to run your business in the most tax efficient way possible
• Help so you can understand the taxes you need to pay
• Advice on the best ways to manage your business
• Updates and reminders so you'll never miss a deadline
• Help to ensure you maximise your tax allowances
• Provide proactive tax advice throughout the year

We’ve saved our clients up to half on their accountancy bills – if you’d like a quote, click on the quote me button to the right of this page. Alternatively, call us on 0500 234111 / 01442 275767 or email aaron.oneill@easyaccountancy.co.uk

We also have a money-back service guarantee - all of your telephone calls and emails will be answered on the same day, or we will refund your monthly fee (another first within the accountancy world).

To appoint us as your accountants, please fill in our Client Agreement Form online.

If you are a contractor working through a limited company then visit SJD Accountancy (our sister company) who specialise in providing tax advice and accountancy services for Limited Company contractors.

You may also find the following pages helpful:

• Free guides
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