Set up of a PAYE (Pay As You Earn) scheme is a fundamental step for UK companies that employ staff. PAYE is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance Contributions (NICs) directly from employees’ wages. While it’s entirely feasible for businesses to manage this process themselves, many find that enlisting the services of a payroll company simplifies the procedure significantly.
Here’s a guide on how to set up a PAYE scheme, alongside insights into why hiring a payroll services company could be advantageous.
Understanding PAYE
Before setting up a PAYE scheme, it’s crucial to understand what it entails. PAYE is not only about deducting tax and NICs; it also involves student loan repayments, statutory pay entitlements like maternity or sick pay, and contributions to workplace pension schemes. Compliance with PAYE regulations ensures that employees are paying the correct amount of tax and that employers are meeting their legal obligations.
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How to set up a PAYE scheme
- Check if you need PAYE
Not every business needs to register for PAYE. If all your employees are paid below the Lower Earnings Limit for National Insurance and do not receive expenses or benefits, you may not need to register. However, most businesses with employees will need to set up a PAYE scheme.
- Register with HMRC
You must register for PAYE with HMRC before the first payday. Registration can be done online through the HMRC website, and you’ll need your company’s Unique Taxpayer Reference (UTR), details about your business, and information on your employees.
- Choose payroll software
To manage PAYE, you’ll need payroll software that is compatible with HMRC’s systems. This software will help you report to HMRC each time you pay your employees, calculate tax and NICs, and submit the necessary reports and payments to HMRC on time.
- Collect and maintain employee information
You’ll need to collect and maintain accurate records for each of your employees, including their National Insurance number, tax codes, and previous payroll information if they’ve worked elsewhere in the same tax year.
- Report to HMRC
Each time you pay your employees, you must report their earnings and deductions to HMRC using the Full Payment Submission (FPS) process through your payroll software. This needs to be done on or before each payday.
- Pay HMRC
You’ll need to pay HMRC the tax and NICs you’ve deducted from your employees’ pay, usually every month. The due date for these payments is the 22nd of the month (or the 19th if you’re paying by cheque).
The benefits of hiring a payroll services company
While setting up and managing a PAYE scheme is doable, it can be complex and time-consuming, especially for businesses without a dedicated payroll department. Here’s why hiring a payroll services company can be beneficial:
- Expertise: Payroll companies have the expertise to ensure compliance with all HMRC regulations, reducing the risk of errors and penalties.
- Efficiency: Outsourcing payroll frees up your time so you can focus on core business activities.
- Cost-effective: For many small to medium-sized businesses, outsourcing is more cost-effective than maintaining an in-house payroll system and staying updated on payroll legislation.
- Security: Payroll providers offer secure systems for managing sensitive employee data and ensure that this information is handled in compliance with data protection regulations.
In conclusion, setting up a PAYE scheme is an essential aspect of running a business with employees in the UK. While it’s possible to manage this process internally, the complexities and demands of payroll management often make outsourcing to a payroll services company a practical and wise decision.
Not only does this ensure compliance with HMRC requirements, but it also allows businesses to allocate their resources more effectively, focusing on growth and operational efficiency.
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FAQ for PAYE scheme set up
PAYE, or Pay As You Earn, is a system used by HMRC to collect Income Tax and National Insurance Contributions directly from employees’ wages as they earn them. It’s important because it ensures that employees’ tax obligations are met automatically, and it helps employers comply with their legal duties.
Not all businesses need to register for PAYE. If you do not pay your employees above the Lower Earnings Limit for National Insurance and they do not receive benefits or expenses, you might not need to register. However, most businesses with employees will need to set up a PAYE scheme.
You can register for PAYE online through the HMRC website. You’ll need your company’s Unique Taxpayer Reference (UTR), business information, and employee details. It’s essential to register before your first payroll run.
Yes, it’s possible to manage PAYE yourself. You will need compatible payroll software to calculate deductions, report to HMRC, and maintain accurate employee records. However, this can be complex and time-consuming, particularly for businesses without payroll expertise.
Choose payroll software that meets your business needs and is compatible with HMRC’s RTI (Real Time Information) system. Consider features like ease of use, customer support, and compliance with the latest payroll regulations. It’s also beneficial to read reviews and possibly try demos before making a decision.
You’ll need to collect several pieces of information for each employee, including their full name, address, date of birth, National Insurance number, and tax code. If they’ve worked elsewhere in the same tax year, you’ll also need their previous pay and tax details.
You need to report to HMRC every time you pay your employees, on or before payday. This is done through the Full Payment Submission (FPS) process, using your chosen payroll software.
If you make a mistake in your PAYE submissions, you should correct it as soon as possible. Small errors can often be corrected in your next FPS. For larger errors or those relating to previous tax years, you may need to use an Earlier Year Update (EYU) or contact HMRC for guidance.
For many small to medium-sized businesses, hiring a payroll services company can be more cost-effective than managing payroll in-house. Outsourcing can save time and resources, reduce the risk of errors, and ensure compliance with complex payroll legislation.
Reputable payroll services companies invest heavily in security measures to protect sensitive data. They comply with data protection laws and ensure that employee information is handled securely. When selecting a provider, it’s essential to inquire about their security practices and ensure they meet your standards.