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Working out tax and National Insurance for employees

Last updated: 31 March 2022

Working out tax and National Insurance for employees

If your business has employees, you must set up payroll arrangements. You need to work out the tax and National Insurance contributions you owe and pay them to HM Revenue & Customs. Exactly what are your responsibilities for PAYE and how do you get started? When do you apply PAYE and what about employee tax codes and administration? In this article we look at the basics of PAYE and outline how to get further help. There is further detailed advice about keeping PAYE records and administration under the Duport keeping records section.

For each employee, you must deduct tax and National Insurance through PAYE, and to do this you must register as an employer with HM Revenue & Customs. When you do this you will receive a PAYE reference number and a New Employer’s Starter Pack. All forms, tables and information you need to operate your payroll system are included (plus a CD ROM). This will help you calculate the correct income tax deductions, taking account of the various rates, allowances and limits available. You must make the deductions before you give out the pay packet.

Basically, as an employer you have to work out what you owe and send it to HM Revenue & Customs by the 19th of each month (or the 22nd if you make electronic payments). There are financial incentives for small businesses to make returns online (see separate article) and it obviously cuts down on paperwork. It is possible to pay quarterly if your average monthly payments are likely to be less than £1,500.

Use the form in the starter pack (P11) to record the income tax and National Insurance due from each employee and the employer’s National Insurance contributions you must also pay. Other deductions, such as pensions, need to be taken into account and will obviously affect the size f the pay packet. If your employee has a student loan you have to subtract deductions for this if necessary and pay them over to the revenue. You may also need to pay working tax credit to certain employees, although this employer hassle will be phased out by April. Tax credits are designed to help top up low earnings and you will be told if this is the case. Again record all these items on the form P11. This P11 form is simply a working paper of all wage payments to employees. The CD ROM is useful as a learning package to help you become familiar with the system.

Obviously you need your employee’s National Insurance number and tax code before you can start. If the employee has worked before they will have a P45 from a previous employer which will give the details you need, and if not you can start them off with their insurance number and the form P46 which is in the employer’s pack. If this is the case you need to then contact the helpline.

Remember also that employees and directors are also taxed on benefits in kind – such as company car or medical insurance, and as an employer you will have to pay Class 1A NICS on benefits as employer. However you pay these at the end of the tax year and not under PAYE.

It sounds daunting, and initially, it is. However you can get one to one payroll advice from the HM Revenue & Customs New Employer’s Helpline. Ring them to get the Employer’s Starter Pack (0845 60 70 143). There is also a Tax Credits helpline (0845 300 3900) and the HM Revenue & Customs website is very informative and contains guides to download, plus specific figures on rates and lots of general information. See also the detailed account of how and when to apply PAYE

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