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Compliance and tax

PAYE and NIC

Pay As You Earn (PAYE) is income tax and national insurance contributions paid to HMRC. Employee taxes and national insurance contributions are deducted from the employee wages and paid to HMRC by the employer, along with employer contributions.

On the 22nd of the following month after payroll has been run, an employer owes HMRC:

Income tax

Employer and employee NI

Student loan deductions

If payment is not made by the 22nd of the month, interest accrues at 3% per annum.

Deductions available for your PAYE and NI bill:

Employment allowance

A company is eligible if their employers’ Class 1 NI liability was less than £100,000 in the previous tax year

This will reduce your Class 1 NI liability by £4,000 each tax year

You can claim this dating back to 4 tax years (2016/17)

Monthly payments

Income tax

PAYE is a cost to the employee deducted from their gross salary. The amount of PAYE paid each month is based on the employee’s tax code. The tax code is determined by HMRC. Most payroll software can be linked to your HMRC account to automatically update for any tax code notification received from HMRC.

If an employee thinks there is an error in their tax code, they must call HMRC directly. As an employee you are not able to change these tax codes, as long as they agree to the latest notification from HMRC.

National Insurance

There are different ‘classes’ of National Insurance (NI). The type people pay depends on their employment status and how much they earn.

Class 1 National Insurance thresholds paid by employers and employees depending how much the employee earns.

Class 2 and Class 4 National Insurance is paid by people who work for themselves, depending on their profits.

Class 3 National Insurance is paid a voluntary National Insurance to fill or avoid gaps in your record (i.e. living abroad or unemployed but not claiming benefits).

As an employer you will be paying employer and employees Class 1 National Insurance to HMRC. Employee NI is deducted from the employees salary and is charged at 12% of gross salary once the threshold is met. Employer NI is charged at 13.8%.

For details on the thresholds and rates for the above classes refer to the

HMRC website⁠

National Insurance for Directors

Directors are employees and pay NI on their annual income (salary + bonus) over £9,500. This differs to employees whose contributions are based on their pay in each period.

There are two methods to calculate these contributions. Most payroll software will ask you your preferred method when setting up directors.

Standard annual earnings period method

Typically used when directors are paid regularly

Each time a director is paid, NI contributions for that pay period is calculated and paid

At the end of the tax year a final calculation is done to ensure the appropriate amount of NI has been paid

Alternative method

Each time a director is paid, NI contributions for their pay year to date is calculated

To calculate what to pay, deduct payments made in the tax year and pay the remaining amount.

Here’s an example for a director earning £7,500 per month (£90,000 per annum) using the alternative method:

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Student loan

For employees with student loans, repayments are deducted from their gross salary and paid by the employer to HMRC.

There are three types of student loans.

For Plan 1 student loan repayments are:

made once gross income is over £372 a week or £1,615 a month

9% of the amount you earn over the threshold

For Plan 2 student loan repayments are:

made once gross income is over £511 a week or £2,214 a month

9% of the amount you earn over the threshold

For Postgraduate loan repayments are:

made once gross income is over £404 a week or £1,750 a month

6% of the amount you earn over the threshold

You can identify which plan an employee is on from their P45. If you do not have this, assume they are on Plan 1.

If this is incorrect, you will receive a notification from HMRC with the correct plan type.

For further details on student loan repayment refer to the

HMRC website⁠

Annual submissions

P11d

Due by: 6th July following the tax year

Payment due by: 22nd July following the tax year

This includes any personal items paid by the company on behalf of directors/employees, such as:

Private medical/dental insurance

Personal mobile/home phone (where contract is in individuals name not the company)

Loans to individuals of more than £10,000

Company vehicles

Any other private subscriptions for example golf fees, football season tickets

PAYE Settlement Agreement (PSA)

Due by: 5th July following the tax year

Payment due by: 22nd October following the tax year

Any expenses, payments or benefits in kind covered by a PAYE settlement agreement do not need included on your P11d.

PAYE forms

P60

Employers are required to provide employees a P60 on an annual basis at the end of each tax year. This details how much tax the employee has paid on their salary in the tax year.

Most payroll software automatically create P60s to send to employees.

P45

Employees receive a P45 when they stop working for you. This shows the employee how much tax they’ve paid on salary earned in the tax year so far.

Resources

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PAYE forms: P45, P60, P11D⁠

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Rates and allowances: National Insurance contributions⁠

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Repaying your student loan⁠

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Employment Allowance⁠

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