13.03 – Handling Employment Taxes
Managing employment taxes is a crucial responsibility for any business owner. Not only must you pay tax on your business profits and collect VAT from suppliers, but you also have to manage your employees’ tax affairs. As an employer, you are legally required to ensure that your employees’ taxes are paid. If they fail to do so, you could be liable, so it’s important to collect tax from employees’ pay before paying them.
Paying PAYE
HMRC collects income tax from employees through the Pay As You Earn (PAYE) system, ensuring that income tax is collected as it’s earned rather than assessed later. If your business is a limited company, directors (including yourself) are considered employees, and PAYE must be applied to all salaries and bonuses paid to directors.
HMRC provides booklets that explain how PAYE works. The main documents needed to operate PAYE are:
- Deduction working sheet (Form P11) for each employee
- PAYE Tables: These books are updated with prevailing tax rates and include:
- Table A: Shows the amount an employee can earn before paying tax
- Tables B to D and LR Taxable Pay Tables: Show the tax due on an employee’s taxable pay
- Form P45: Given to an employee when transferring from one employer to another
- Form P46: Used when a new employee doesn’t have a P45 from a previous employer
- Form P60: Used to certify an employee’s pay at the end of the tax year in April
- Form P35: Year-end declaration and certificate for each employee, summarizing all tax and NI deductions for the tax year
- Form P6: Tax codes advice notice issued by the inspector of taxes, indicating which tax code to use for each employee
To work out the tax deduction for each employee:
- Add the current week’s gross pay to the previous total of gross pay to date.
- Check the employee’s tax code number in Table A to find the tax-free pay amount for that week.
- Deduct the tax-free pay amount from the total pay to date to get the taxable pay.
- Calculate the tax due on the total taxable pay for the year to date using Table B.
- Deduct the tax already accounted for in previous weeks from the total tax due to find the tax due for the current week.
Allocating National Insurance
In addition to deducting income tax, employers must also deduct National Insurance (NI) contributions. Three rates of contributions apply for NI purposes:
- Table A: The most common rate, used in most cases
- Table B: Used for certain married women who have a certificate for payment at a reduced rate
- Table C: Used for employees over pension age
For Tables A and B, you need to calculate both the employee’s and the employer’s contributions. For Table C, no employee’s contribution is payable. Record the amounts of contributions on the same deduction working sheets used for income tax purposes.
Refer to the appropriate table to find the NI due. The tables show both the employee’s liability and the total liability, including the employer’s contribution for the week or month. Record both figures on the deduction working sheet.
Accounting for Employment Taxes
When paying wages and salaries to your staff, record the net pay in your cash book along with the PAYE and NI paid to the collector of taxes.
If you have only one or two employees, the cashbook records and PAYE documentation may be sufficient. For more employees, keep a wages book.
The deduction working sheet provides a record of payments made to each employee throughout the year. You also need a summary of payments made to all employees on a specific date.
The law requires employers to provide itemized pay statements (payslips) to their staff, showing:
- Gross pay
- Net pay
- Deductions: Stating the amounts and reasons for each deduction
Employers have a legal obligation to operate PAYE on payments to employees if their earnings reach the NI lower earnings limit (LEL). Details on employment taxes can be found on the HMRC website: HMRC PAYE for Employers.
If none of your employees are paid £120 or more a week, receive expenses and benefits, have another job, or get a pension, you don’t need to register for PAYE. However, you must still keep payroll records. If your employees earn more than £120 per week, use the HMRC online system.
Alternatively, you can use a payroll bureau to handle the details for you, which is often money well spent. Your accountant or bookkeeping service may also offer this service or provide recommendations.
Managing employment taxes accurately ensures compliance with legal requirements and helps maintain smooth business operations.
