PAYE stands for ‘Pay As You Earn’. Every limited company, even if the director is the sole employee, must register to set up its own payroll, which deducts income tax and National Insurance Contributions from salaries paid to all staff employed by the company.
How the PAYE scheme works in practice
1. Firstly, you must register your limited company as an employer with HMRC. Once you have all the required information to hand, you can do this easily online or via the phone. You can find more in this HMRC guide. After you have applied, you will receive a unique employer PAYE reference number.
2. You (or more likely your accountant) will set up the company payroll, using one of the commonly used software packages (or more latterly, online accounting tools). You will need the P45′s for each employee, in order to accurately calculate the right income tax and NIC deductions using the appropriate tax code. For employees who do not have a P45, a P46 will be used in the short term.
3. Each month, your accountant (or online accounting system) will issue each employee with a payslip, detailing the gross and net pay, plus deductions for income tax and NICs.
4. All taxes are deducted at source, and must be paid to HMRC by the 19th of each month (or each quarter if the amounts are small). If you pay electronically, you must do so by 22nd of each month (or quarter).
5. If your salary does not meet the current income tax or NIC thresholds, you still need to inform HMRC online that ‘nil’ tax is owed.
6. For each new employee, you must add them to the payroll, and provide a P60 at the end of each tax year (a summary of salary paid and tax deducted). A P11d form must also be completed if any employees received any taxable benefits during the year.
7. When an employee leaves the company, you must issue them with a P45 to transfer to their next employer.
You can read more about the finer details of PAYE registration, online filing and your duties as an employer in this HMRC guide.
- What level of salary should I pay myself as a limited company director?
- Limited company tax – the basics
- What are the tax advantages of operating via a limited company?
- Value Added Tax guide for limited companies
- What are limited company dividends?
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