Take a look at any recent payslip and you’ll see some PAYE deductions that have been taken automatically. While everyone who is employed by a business will be subject to PAYE, the amount that’s taken can vary. It doesn’t just relate to employees either, as employers also have key responsibilities to know about around PAYE.
In this article, we explain exactly what PAYE is, how it’s calculated and what you can do if you think you’re being over or undercharged.
PAYE: The definition
PAYE stands for ‘pay as you earn’ and is automatically taken from an individual’s salary before they receive it. The amount deducted is ultimately sent to HMRC.
PAYE was first introduced in 1944 and is the most common way for employees to pay their income tax. Other common automatic deductions that can be found on payslips are student loan repayments and National Insurance.
How is PAYE calculated?
The amount of PAYE that is deducted from an individual’s salary will depend on how much they earn in the first place, as well as their personal allowance. ‘Personal allowance’ is the amount that someone is allowed to earn, tax-free, every year. In the 2021–22 tax year, this stood at £12,570. You are allowed to earn up to this amount before paying any tax. The amount can and does change; in 2020–21, the personal allowance was set at £12,500.
Once someone earns over this amount, they’ll have to pay income tax at a rate of either 20%, 40% or 45% depending on how much they earn overall. As an employer, you’ll need to know your employees’ tax codes in order for the PAYE to be deducted.
How is PAYE paid?
As long as you know your individual employees’ tax codes, you don’t need to worry about paying PAYE. This is because it is taken automatically before your employees’ salary even reaches them. It is usually split into payments throughout the year.
If at the end of the tax year it’s found that someone has paid too much, they’ll get a refund. Likewise, if someone has paid too little, HMRC will get in touch with them directly to ask for an additional payment. However, your employees are able to go online and check how much income tax they should be paying, as well as how much they actually are paying.
What are my PAYE responsibilities as an employer?
If you’re an employer, you’ll need to register for the HMRC PAYE Online service. Using this platform, you can check what you owe, pay any remaining balances, oversee all payments, access tax information about your employees (including their tax codes), appeal tax penalties, and much more.
You will receive access to this platform once you’ve registered as an employer. If you haven’t yet got your login, it’s wise to enrol. It is through this platform that you will receive crucial notices about your employees’ tax codes, deductions and any other information.
PAYE and pensions
Both employers and employees will also be subject to PAYE if they receive income through a pension. In a similar way to how PAYE is taken from a monthly salary, the amount of pension that an individual receives will have already had the appropriate taxes deducted. The deductions are enacted through pension providers in much the same way that an employer collects the tax and sends it to HMRC.
For those with two pensions, such as a private scheme and workplace pension, HMRC will ask only one of the providers to deduct the tax for the state pension payments.
It’s important to note that if an individual only has a state pension, they will need to complete a self assessment tax return every year. If the same individual works, as well as receiving a state pension, it’s up to the employer to collect the appropriate tax that the individual is required to pay from their earnings and pension.
PAYE and self-employment
Those who are self-employed need to fill in a self assessment form every year. This will calculate exactly how much tax they are required to pay, based on their earnings, and provide a deadline for payments.
There is an opportunity for self-employed people to pay their tax via PAYE. They must meet the following criteria:
- The tax bill must be less than £3,000
- They have another job where tax is taken through PAYE
- They submit paper tax returns by 31st October or online returns by 31st December
If these conditions are met, HMRC will automatically take PAYE payments, unless they have been asked not to. If someone only meets one of the above criteria, they will need to pay the required tax in instalments.
Which documents should I be aware of?
When it comes to PAYE, both payslips and P60s are important pieces of documentation for employers and employees. At the end of each tax year, in April, employees will receive a P60 from either their pension provider or employer. This will highlight the total amount they’ve been paid, the total tax deducted and their net income.
If someone has more than one pension provider or employer, each pension provider or employer will be required to send a P60. It’s important that employees check that this is correct and that they haven’t been overpaid or underpaid. Checking this information can be done using the online checker, or by getting in touch with HMRC.
Payslips — which will most likely be received every month or week, depending on the method of payment — will detail how much tax an employee has paid, their tax code and any other tax deductions and repayments.
How do I know if my employees have paid the right amount of PAYE?
As mentioned, as long as you have the correct tax code for your employees, the correct amount of tax will be deducted. However, if one of your employees has underpaid or overpaid, they will receive a P800 tax calculation from HMRC when the tax year ends on 5th April.
This can take a few months to arrive. This document will highlight how much tax, if any, is due to come back to the individual. It will also highlight if any tax is owed.
Employees may also receive a P800 if there’s been an overlap in jobs and they have been paid by two employers in one month, or if they started receiving a workplace pension. People starting a new job who had previously been in receipt of Jobseeker’s Allowance or Employment and Support Allowance may also receive one of these documents.
What happens if my employees haven’t paid the right amount of PAYE?
As mentioned, if HMRC believes that someone has underpaid tax, they will receive a P800 at the end of the tax year. Their tax code will also be changed for the next tax year, often reducing their personal allowance. This will mean they must pay a higher percentage of tax.
There is a £3,000 limit on the amount of money that can be taken in this manner. If HMRC believes that someone owes more than this amount, they will request direct payment. Your employees can appeal this decision if they think it’s wrong.
What happens if my employees have paid too much PAYE?
Similar to when HMRC believes that someone hasn’t paid enough, if they are thought to have paid too much, they’ll receive a P800. A cheque will then be sent in the post as a refund. Typically, this will have arrived by September. If an individual thinks they have overpaid but have not received a refund, they should contact HMRC directly or create a claim online.
Can PAYE be written off?
There is something called Extra Statutory Concession A19. This is when HMRC stops chasing income tax and capital gains tax from a certain individual because they have not made timely or proper use of the person’s financial information. There are a number of other reasons that HMRC may write PAYE off. These include the following:
- An individual was alerted about arrears more than a year after the specific tax year
- They were notified about an overpayment at the end of a tax year, after receiving a refund from HMRC
- They believed that they had paid the right amount of tax
If you have any further questions about income tax or any other business-related matters, please get in touch. Uniwide Formations can support you to register your limited company with Companies House or change your registered address details. Our experts will be happy to talk you through the different company formation packages we offer, as well as advise on a number of other related situations — helping you can find the best solution for your circumstances. For more information about our services and how we can help your business please contact us.