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Wages Salaries And Paye Administration

PAYE is the common abbreviation for the Pay As You Earn scheme which is a payroll administration system where employers deduct income tax and national insurance contributions from employees

Every employer in the UK must register as an employer with the tax authority. Register to administer a PAYE scheme is obligatory if the employee has other paid employment or has earnings at or above the PAYE threshold and liable for deductions of income tax, or has earnings at or above the national insurance lower earnings level. Registration can take place up to four weeks before the first qualifying employee is engaged.

The paye system is a scheme whereby employees are deducted income tax and national insurance on a weekly or monthly basis according to the frequency of wage and salary payments by the employer who then pays the income tax and national insurance contributions over to the inland revenue in the UK each month.

The employer is also responsible for keeping a record of the employers national insurance contributions which together with the employee deductions are paid over to the tax authority on or before the 19th of the month following the pay period. Small business that has a quarterly liability to income tax and national insurance less than 1,500 pounds per quarter can arrange to pay the PAYE every three months rather than every month.

PAYE administration involves the calculation of income tax using a tax code system. Every employee receives a tax code which usually consists of a number indicating the amount of tax free allowances that employee is entitled to and one or more letters to indicate any tax conditions that should be applied. Special conditions and circumstances for each employee is usually representing in the tax code with a letter known as a suffix to the prefix tax code number.

The financial tax year in the UK is from 6 April one year to 5 April the following year with each tax year divided into 53 specific week numbers that accounts for days over at the end of the year and also into 12 monthly periods. Income tax deducted is calculated by the employer operating the PAYE scheme on a cumulative basis during the tax year by using either manual tax tables or a payroll software package. The tax code is devided throughout the year into weekly and monthly amounts to produce a tax table.

To calculate the income tax the employer determines the cumulative tax free allowance in a specific week or month and deducts this allowance from the cumulative gross pay that employee is due at that tax week including current wages or salary and all previous income earned during the current tax year including any earnings from other employers. Having established the taxable pay that amount is then applied to the percentage of income tax to be paid under the current tax rules for that financial year.

The employer is responsible for deducting the correct amount of income tax, issuing the employee a payslip to advise the income tax deducted and also for paying the income tax deducted to the tax authority. The PAYE calculations and production of payslips is an essential function of payroll software that many employers adopt to ensure accuracy and compliance with the regulatory bodies tax rules.

An important area of the pay as you earn administration is the deduction of national insurance by the employer from each employee. National insurance contributions are calculated not on a cumulative basis as income tax but are calculated according to the gross income earned in a specific pay period based upon the gross pay during that weekly or monthly pay period.

The amount of national insurance deducted is determined by looking up the employee gross pay on a national insurance deductions table. A different national insurance table is applied according to the personal circumstances of the employee. In addition to the employee national insurance contribution each employer also has to pay an employer national insurance contribution.

PAYE administration is a series of payroll and deductions documentation related to the payment of wages and salaries to employees. The majority of businesses use payroll software to automate the calculations and produce the information required for the PAYE returns.

The starting point of the PAYE system is the P45 which all employees receive when they leave an employment and is a certificate of the cumulative gross pay and income tax deducted up to the date of the P45. Details from the P45 also include the employee tax code that must be entered into the employee PAYE records to enable the new employer to calculate the income tax due to date.

If an employee does not hand the new employer a P45 then they are taxed on a week to week basis until the tax code and cumulative income tax position are known. When an employee does not have a P45 showing gross pay and income tax from previous employment the employer has to complete a P46 for that employee which is sent to the inland revenue who subsequently advise the tax code and tax conditions to be applied.

Having engaged an employee and deducted income tax and national insurance contributions the employee must receive a payslip from the employer showing the gross pay, deductions and net pay. In additional the employer also needs to maintain records of payments to the employee and deductions made. Payroll software can produce these records and the Inland Revenue also provide small employers with a P11 deductions working paper for this purpose.

Having accumulated and recorded the financial information throughout the financial year sveral documents must be prepared and submitted by the employer. Each employee has to be given a P60 certificate of earnings and deductions during the financial year. The P60 is an important document and often required for many diverse purposes unconnected with the PAYE system such as future mortgage applications and other purposes as proof of income.

The employer also has to complete a P14 for each employee which is the form on which the employee deductions and statutory payments are recorded. The P14 is the document each employer has to complete for each employee advising HMRC the deductions made.

In addition every employer also has to complete a P35 which is the Annual Employers Return which lists the name of every employee, the income tax deducted and national insurance liability including employee and employer contributions. The P35 also includes statutory payments made to employees and the amount of the employer has already paid to the Inland Revenue. To encourage online filing of paye annual returns the revenue offers a tax free bonus for filing annual P35 tax returns online.

Article Source: http://www.newagelivingarticles.com

Terry Cartwright, CEO at DIY Accounting and qualified accountant designs UK Payroll systems providing Paye solutions for small to medium sized business with Payroll Software written on excel spreadsheets for up to 20 employees.

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