PAYE system

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The system for paying income tax for employed individuals

How does PAYE work?

Most tax in respect of employment income is deducted under the PAYE system. 

The objective of the PAYE system is to collect the correct amount of tax over the year. 

An employee’s PAYE code is assigned to ensure that their allowances etc. are given evenly over the year.

The PAYE system applies to most cash payments, other than reimbursed expenses, and to certain non-cash payments.

  • In addition, PAYE applies to round sum expense allowances and payments instead of benefits.

  • It is the employer’s duty to deduct income tax and national insurance contributions from the pay of his employees. 

    If he fails to do this, he must pay over the tax which he should have deducted and the employer may be subject to penalties.

  • It is now possible for an employer to choose to include most taxable benefits within their normal payroll, with the employee’s income tax liability being collected under PAYE. This is referred to as the payrolling of benefits.

    Living accommodation benefits and beneficial loans must still be reported on the P11D.

    Any “Payrolled” benefits do not now have to be reported on the P11D. 

    The P11D is a form submitted by the employer that lists the benefits provided to an employee in a tax year.

PAYE codes

An employee’s PAYE code indicates the amount of tax free pay he is entitled to. 

The PAYE code will include the employee’s personal allowance and any allowable deductions and be restricted be various taxable amounts.

  • The codes are determined by HMRC. 

    The employer must act according to the code unless further notified by HMRC, even if the employee appeals against the code.

PAYE Forms

Employers must complete forms P60,  P11D and P45.

  • A P45 is needed when an employee leaves

    When an employee leaves, a form P45 (particulars of Employee Leaving) must be prepared. 

    This form shows the employee's code and details of his income and tax paid to date and is a two part form handed to the employee.

    One of the parts is the employee's personal copy. 

    If the employee takes up a new employment, he must hand the other part of the form P45 to the new employer.

  • Form P11D records details of benefits

    Following the end of each tax year, the employer must submit the P11D to HMRC by 6 July.

    A copy of the form P11D must also be provided to the employee by 6 July. 

    The details shown on the P11D include the full cash equivalent of all benefits, so that the employee may enter the details on his self-assessment tax return. 

    Specific reference numbers for the entries on the P11D are given to assist with the preparation of the employee's self assessment tax return.

  • Forms P60 is a year-end return

    At the end of each tax year, the employer must provide each employee with a form P60

    This shows total taxable earnings for the year, tax deducted, code number, NI number and the employer's name and address. 

    The P60 must be provided by 31 May following the year of assessment.

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