The Office of Tax Simplification (OTS) recently called for a comprehensive review of the Pay as You Earn (PAYE) system, to ensure tax agents can 'see relevant client information' and 'access a number of key services'. Here, we take a look at the PAYE system and how it operates.
How does the system work?
PAYE is the system through which employers deduct an amount of income tax, national insurance contributions (NICs) and student loan repayments from employees' wages, in accordance with the relevant PAYE codes and HMRC procedures.
Employers must normally operate PAYE as part of their payroll process: however, if none of the employees are paid £118 or more per week, receive expenses and benefits, have an additional job or receive a pension, employers do not have to register for PAYE. However, they must still keep payroll records.
A look at Real Time Information (RTI)
Employers are required to report using the PAYE system in real time. Under RTI, employers or agents must make regular payroll submissions for each pay period during the year. These must detail payments and deductions made from employees each time they are paid. Employers must make two main returns: a Full Payment Submission (FPS) and an Employer Payment Summary (EPS).
Employers must send the FPS to HMRC on or before the date employees are paid. All employees must be included, even if they earn less than £118 per week.
Certain situations require employers to submit an EPS. These include:
- instances where no employees were paid in the tax month
- instances where an employer received advance funding to account for statutory payments
- cases where statutory payments (such as Shared Parental Pay) are recoverable, alongside a National Insurance Compensation Payment
- cases where Construction Industry Scheme (CIS) deductions are suffered, which could be offset (please note that this applies to companies only).
The amounts recoverable are offset against the amount due from the FPS. This helps to calculate the amount payable. An employer's EPS must be with HMRC by the 19th of the month for it to be offset against the previous tax month's payment. At the end of the year, employers must make a final FPS or EPS return to inform HMRC that all payments and deductions have been reported.
PAYE and new businesses
As soon as a new employer takes on employees, they must contact HMRC. A PAYE scheme must be set up for the business. HMRC provides new employers with guidance, including a variety of forms, and online 'basic PAYE tools'. These help employers to calculate the amount of tax and NICs due.
It is vital that employers understand the requirements: HMRC often carries out compliance visits, and these may occur at any time. Employers will be held liable for any under-deductions HMRC finds.
HMRC issues penalties to employers who fail to meet their PAYE reporting requirements. You could be liable for a penalty if your FPS was late; if you failed to send the correct number of FPSs; or if you failed to send an EPS when you didn't pay any employees in a tax month. Fines range from £100 for firms with one to nine employees, to £400 for businesses with 250 employees or more.
Managing a PAYE scheme can be challenging: that is where we can help. Please contact us for more information.