What You Need to Know About PAYE
PAYE and how it affects HMRC on a monthly basis
I know, I know – taxes and payroll can be a bit mind-boggling, but fear not! I'm here to break it down and make it painless.
So, let's unravel the mysteries of PAYE, ensure your payments are on point, and even sprinkle in some details about that sweet thing called Employment Allowance.
Understanding PAYE and HMRC:
When you run a payroll, you are not just paying your employees, but you also have to pay HMRC the tax deducted from staff as well as the national insurance due to (both employer and employee class 1 national insurance)
Here's the scoop on how it all syncs with HMRC every month:
Calculating Tax and National Insurance:
As you process your employees' pay, you're simultaneously calculating the income tax and National Insurance contributions they owe. This is based on their earnings and the tax codes provided by HMRC.
Reporting to HMRC:
You send a Full Payment Submission (FPS) report to HMRC, detailing all the pay, deductions, and taxes for each employee. This appears on HMRC’s Government Gateway on the 11th of the following month.
This is important to understand, because you might run your payroll on the 28th of the month, expecting HMRC to be updated immediately, and it only reflects on the 11th of the following month.
Sending Payments to HMRC:
When payday rolls around, you are not just paying your staff but you are also making payments to HMRC for the income tax and National Insurance collected.
Lots of sole directors of businesses get confused with this part and we encourage everyone to look at your payroll reports or ask us if you don’t understand.
Correcting Mistakes:
Oops, did you accidentally add an extra zero to someone's salary? No worries, we're all human. Just send a corrected report, known as an Earlier Year Update (EYU), to set the record straight.
Annual Reporting:
At the end of the year you'll provide HMRC with a summary of all your employees' pay and deductions in the form of an Employer Payment Summary (EPS).
Getting Your Payments Right: Ensuring Accurate PAYE Payments
Now, let's discuss the strategies that can help you ensure your PAYE payments are accurate and timely:
Staying on Schedule:
Timely submissions are crucial – think of it like arriving promptly to an important meeting. To avoid penalties, be sure to submit your FPS and EPS on time.
Accurate Reporting:
Precision is key. Incorrect data or confusing tax codes can lead to unnecessary complications. Take the time to review your reports thoroughly and ensure they're accurate.
Embrace Technology:
Don't hesitate to leverage payroll software. It's a practical way to minimise the risk of human errors and maintain an organised payroll system.
Remember to include benefits in kind; items like medical insurance, car benefits etc.
Understanding Employment Allowance: Your Tax Advantage
Let's talk about a topic everyone loves: tax breaks!
Enter Employment Allowance, a valuable opportunity to reduce your expenses. Employment Allowance serves as a deduction on your Class 1 National Insurance contributions.
In simpler terms, it's a method for smaller businesses to lower their payroll expenses. If you're an employer who pays Class 1 National Insurance, you might qualify for this allowance. The current allowance is £5000 (and this might change).
Remember you can’t claim employer allowance if you are the only employee of the business, you employ a domestic worker i.e. nanny or a cleaner, or if you are a public authority.
Now, what if you're a savvy entrepreneur running more than one business?
Great question! If you're the employer of multiple businesses, it's important to note that the Employment Allowance is usually limited to one business or group of connected businesses.
However, if you have multiple PAYE schemes for separate businesses under the same ownership, you'll need to choose which one can claim the allowance.
Remember, it's typically not possible for all your businesses to claim the full allowance individually. So, it's wise to strategize and choose the scheme where the allowance will provide the most benefit.
Securing this allowance is straightforward. When you're sending your FPS, you can indicate your intention to claim the Employment Allowance, it's a seamless process!
When we do the payroll for clients, we use Xero Payroll, and tick a box and Xero Payroll calculates it for us and includes this in your payroll submission.