Taking on your first employee is a big step for any business – it immediately boosts your delivery capacity and potential for profit. With that in mind, what are some of the payroll basics you need to pay attention to?
You will need to pay the employee correctly on a monthly basis (typically) and you will also need to ensure that you make the appropriate statutory deductions from your employee’s monthly salary and pay this to the HRMC. (Note, this process is set to change from April 2013 – more on that on the blog soon!).
For many small businesses, the PAYE process can be daunting as it is an administrative task which distracts them from their core business. It is, however, a legal requirement.
The good news is that payroll can be a straightforward process if you follow the guidelines and make use of the tools that are out there to help you.
These FAQs will help explain the basics of paying an employee for the first time and we’ve also provided some useful links to places where you can find lots more help.
What is PAYE?
PAYE (Pay As You Earn) is the system that HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employees’ pay, as they earn it.
What is the relevance of PAYE to me, the employer?
As an employer, it is your responsibility to deduct tax and NICs on behalf of the Government from your employees’ pay for each pay period, and pay this to HMRC. If your employees earn above a certain threshold, you will have also have to pay Employer’s Class 1 NICs.
You also need to supply each employee with a pay statement/pay slip which outlines all these PAYE deductions.
If you use payroll software, it will reduce the administrative burden of this process as it will calculate deductions and automatically generate payslips.
How do I know how much to deduct in tax and NICs?
When your employee joins, you should request both their tax code and National Insurance number. Using this information, along with their earnings to date, you can then calculate how much tax and NI to deduct. You can calculate this manually using information from HRMC or using electronic methods such as payroll software – this is more efficient, reduces errors and is recommended by HMRC.
How do I pay the tax and NIC deductions to the HRMC?
Usually (but not always) you will need to register as an Employer with HRMC before making PAYE payments. You can check here whether you need to register.
In terms of how payments are made, this can be done by post but HMRC strongly recommends that payments are made electronically because it’s more secure and provides certainty about when your payment will arrive. Obviously it saves you traipsing to the post office too.
You can find guidance on how to pay here.
How often do I need to pay PAYE?
You will have to send the most recent pay deductions to HMRC:
- By the 19th of each month if you pay by post
- By the 22nd of each month if you pay electronically
In a minority of cases you may be able to pay quarterly or annually but you should check this carefully.
What forms do I need for PAYE?
There are a number of payroll forms you will need. Some forms give you the information you’ll need to operate PAYE correctly and others are used to tell HMRC about your employees and their pay details.
The forms fall into four categories:
- Employee forms
- Start of the tax year forms
- Payroll administration forms
- Expenses and benefits forms
In addition, if you use good payroll software, you will be able to generate and file many of these payroll forms and returns online with HMRC, ensuring you never miss a deadline or payment.
Find out more
- HMRC – PAYE: The basics for employers
- HMRC – Paying someone for the first time
- Business Link: Paying an employee for the first time
QuickBooks payroll software makes it easier to manage the financial aspects of hiring and paying employees.