Close Menu
Taxes

PAYE Basics

4 Mins Read

Employing staff is a topic in its own right and much more than just making sure that the gross pay is taxed correctly. As well as adhering to employment laws and drawing up employment contracts thought needs to be given to areas such as but not limited to:

  • Legal right to work in the UK
  • National Minimum Wage.
  • The potential need for DBS checks (formerly known as a CRB checks)
  • Insurance
  • Workplace Pensions
  • Registering your PAYE scheme

For more information refer to https://www.gov.uk/employing-staff in the first instance and think about securing the services of employment experts if in doubt.

Payroll and PAYE

If you employ someone, including yourself as a company director but not yourself if you are a sole trader, then you will generally need to operate a payroll system and a Pay As You Earn (PAYE) scheme. A sole trader is not deemed to be an employee of their own business.

You would set up a PAYE scheme if you meet certain criteria including paying someone over a set amount which changes each year. Up to date information on what this amount is can be found on the GOV.uk web site – search for “PAYE and payroll for employers” and register as an employer at https://www.gov.uk/register-employer. You do still need to keep payroll records even if you do not reach the threshold for registering for PAYE.

If you have registered your company as an employer you will need to run your payroll. Using software is the best way to do this.

There are two returns to file each month for payroll:

•          Full Payment Submission (FPS) used to tell HMRC about the payments you’ve made to employees and the deductions made. This has to be filed on or before your employees’ payday

•          If applicable, the Employer Payment Summary (EPS) will need to be filed with HMRC by the 19th of the following tax month for them to apply any reduction on the taxes owed as reported on the FPS e.g. if you are claiming the Employment Allowance, Statutory Sick Pay, Statutory Maternity Pay or CIS (Construction Industry Scheme) deductions

Payroll is complicated and may be an area for you to take advice from an accountant or outsource the running of your payroll if you’ve any employees over and above just yourself.

Payroll references

There are two references associated with running a payroll.

Employer Reference Number

This is known as the ERN. It starts with 3 digits (historically this was the tax office that dealt with your payroll but now it will be 120 or 475) followed by a slash then a code unique to your business. The ERN is used for completing your PAYE returns and on payslips, P60s & P45s. Employees need this for completing their self assessment tax return as well as for any student loans repayments.

More information on PAYE can be found in the dedicated “PAYE Explained” chapter.

Accounts Office Reference

This is 13 digits beginning with the same three digits as the ERN. The Accounts Office Reference is used when the employer makes PAYE payments to HMRC or when they need to discuss anything relating to payroll.

Both of these reference numbers are used on the RTI (Real Time Information) submissions (see more in the section on payroll). If you registered your company online through the GOV.uk web site then you may have been guided through registering for PAYE.

Employment Allowance

If you are operating a payroll with more than one person on it then the Employment Allowance reduces the National Insurance liability each year. That’s a direct saving for your business. The amount does change and the current rate can be found at https://www.gov.uk/claim-employment-allowance.

The employment allowance is not available to one person companies where the only employee is a director. To qualify for the Employment Allowance there must be two employees earning more than the “secondary threshold”.

The allowance is claimed via your payroll by putting Yes’ in the ‘Employment Allowance indicator’ field when you send an Employment Payment Summary (EPS) to HMRC.

How to pay PAYE

Any PAYE due to HMRC must be paid by the 22nd of the next tax month if you pay monthly or the 22nd after the end of the quarter if you pay quarterly. If the payment is made through the post by cheque it must reach HMRC by 19th. Ways to pay PAYE can be found at https://www.gov.uk/pay-paye-tax.