Understanding the UK tax system can be seen by most of us as a tall order, with the UK having the longest list of tax codes in the world. While this can be overwhelming at times, understanding how income is taxed is vitally important, as making mistakes can be costly.
Paying tax on income
PAYE is one of the two main regimes that His Majesty’s Revenue and Customs (HMRC) uses to gather tax on our income. The other is Self-Assessment, which is used for sole traders and the self-employed to self-declare their income and surrender money they owe to HMRC.
If you think you might have obligations to undertake Self-Assessment, then you should consider engaging the services of the many Cheltenham accountants who can help you prepare your return before the deadline.
PAYE, however, is administered by employers on behalf of their employees. It stands for Pay-As-You-Earn, and it eradicates the need for employees to submit their own tax returns to HMRC on their earnings from that employer (though they may have to submit returns on other earnings). It means that they pay tax as they work, rather than receiving a large bill at the end of the tax year.
Who needs to register for PAYE?
Employers must register if they pay employees £123 a week or more. Some contractors also need to register for PAYE if they are subcontracting.
When to register
You must register before your employee’s first payday. You need to tell HMRC about how many people you employ, their salary and any other statutory pay concerns, for example, sick pay. If you have never done this before or feel unsure, you should consider engaging the services of Cheltenham accountants to help you.
How does PAYE work?
Employers, as part of their payroll process, will deduct tax and National Insurance on behalf of their employees, before paying their wages. Employers must then send it to HMRC, reporting on the amounts. The employer must calculate the instalments based on expected earnings and also the employee’s personal circumstances, such as their personal allowance.