Paying tax

PAYE

PAYE (Pay As You Earn) is the HM Revenue & Customs (HMRC) system for collecting income tax from the pay of employees, including directors, as they earn it.

Employers must deduct income tax and national insurance contributions (NICs) from their employees' pay and submit these to HMRC. PAYE applies to all payments an employee receives including:

• salary and wages
• overtime, shift pay and tips
• expense allowances and claims (when paid in cash and, for expense payments, only if they fall within specific criteria
• bonuses and commission
• Statutory Sick Pay
• Statutory Maternity/Paternity/Adoption Pay
• lump sum and compensation payments – such as redundancy payments –unless they are tax-exempt.

Each taxpayer has a personal tax code issued to them by HMRC, which will be found on a new employee's form P45. By using this with HMRC’s taxable pay tables, the employer can work out how much tax to deduct from the employee. If the new employee doesn't have a form P45, they will probably need to complete a form P46.

How to pay: HMRC recommends that PAYE is paid electronically, which helps to avoid penalties for missing deadlines. Methods include:

• direct debit
• Bacs or CHAPS
• internet or telephone banking
• debit card over the internet
• Bank Giro
• payment at the Post Office also counts as electronic.

For more information, visit http://www.hmrc.gov.uk/paye/payments.htm

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