Most Frequently Asked Paye Questions And Answers
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Top questions and answers existing and new employers ask in administering the
Pay As You Earn income tax and national insurance scheme.
What is an income
An income tax code is a reference number which may also include letters or
be entirely letters which determines the amount of gross pay which is free of
income tax deductions and may also determine the way in which income tax
should be deducted. If the tax code contains a number this number represents
the amount of tax free income an employee can earn in a financial year, for
example 522L means an employee has a tax free personal allowance of 5,225
pounds. A BR tax code actually means basic rate and all the employees gross
pay is subject to a tax deduction at the prevailing basic rate of tax.
What does week 1 of month 1basis mean?
Week 1 and Month 1 basis is an instruction to the employer operating a PAYE
scheme to not calculate the income tax on a cumulative basis which is the
normal basis but instead the employer has to calculate the income tax to be
deducted on a non cumulative basis. When the income tax deducted is on a non
cumulative basis gross pay in previous pay periods is ignored.
Because the income tax is deducted on the gross pay in a specific pay
period an employee on a week 1 or month 1 basis does not receive an income tax
refund in respect of previous tax deductions. Normally an employee is placed
on a week 1 or month 1 basis when the tax deductions history for the current
financial year are incomplete and the week 1 month 1 basis is removed when the
missing history is determined
Do I deduct income tax and national insurance if a new starter says they
are self employed?
The decision as to whether a worker is an employee or self employed rests
with the employer responsible for the PAYE administration. If that worker is
determined to be an employee then income tax and national insurance deductions
must be deducted from payments made to that employee.
Tax and national insurance are not deducted from workers designated as self
employed. But it is not as simple as that and any employer who has doubts
should clarify the position with the local Inland Revenue helpline. Making the
wrong decision can be expensive as strict rules are enforced.
Several conditions are applied to determine if a worker is an employee or
self employed and several years after that worker joined the business that can
result in serious potential tax liabilities in the future. The inland revenue
treat the employee status very seriously and have a number of parameters which
they invoke in doubtful circumstances to determine the status of the worker as
an employee rather than self employed.
When the status of a worker is determined by the tax authority to be
employee and not self employed the employer will incur a liability for income
tax and national insurance that should have been deducted from the employee
and also a liability for employers national insurance contributions. The
liability being increased as the Inland Revenue will determine that the amount
paid to the employee was a net wages payment after deductions and the
perceived gross pay thereby enhanced.
As the income tax and national insurance contributions may not be
practically recoverable from the employee and the calculation would be applied
retrospectively to previous years employment the cost to an employer can be
When should national insurance deductions be made from an employee?
National insurance must be deducted from all employees who are over the age
of 16 and under the state retirement pension age of 60 for a woman and 65 for
a man. Equality of employment does not apply to government legislation on
equality of employment between men and women where national insurance
contributions and pension payments are concerned.
In addition national insurance should only be deducted from an employee
wage or salary if that income is at or above the national insurance earnings
threshold. The earning threshold usually changes each year and should be
checked in case of doubt with the current tax thresholds applicable.
What is the procedure when a new employee does not have a P45?
Ocassionally a new employee does not have a P45 containing details of
previous gross pay and income tax deducted in the financial year and the new
employer still has a responsibility to deduct tax and national insurance
contributions from that employee and also advise the inland revenue of the
employee tax status. A P46 must be completed and forwarded to HMRC in cases
where a new employee does not have a P45. Following receipt of the P46 the
Inland Revenue will notify the employer of the income tax deductions to be
In the period from when the employee commences employment and notification
of the employee tax status is received the employer should adopt a week 1 or
month 1 status for that employee and also use an emergency tax code. The
emergency tax code would be the standard personal allowance for that tax year.
Is a medical certificate required before statutory sick pay payments are
It is advisable for an employer to obtain from an employee written
documentation of sickness. This documentation can be in the form of self
certification which should be filed as part of the PAYE administration. If an
employee satisfies all the conditions to receive statutory sick pay and there
is no reason for the employer to doubt the claim then strictly speaking
statutory sick pay can be paid without medical evidence.
How as an employer do I fund working tax credits?
Working tax credits an employer may pay to an employee is deducted from the
PAYE and other deductions that employer has made and is payable to the Inland
Revenue. Eligible deductions include deductions from employees in respect of
income tax, national insurance, student loans and CIS deductions and employer
national insurance contributions. If the deductions are insufficient to cover
the tot6al working tax credit to be paid to an employee the employer can apply
to the Inland Revenue who will fund the shortfall.
Why the employer is charged penalty fines when the accountant submits the
Penalty fines are chargeable to the employer responsible for submission of
the annual PAYE tax returns. If an accountant, bookkeeper or payroll bureau
has been appointed they are permitted to submit tax returns with the
permission of the employer. Arrangements between an accountant or bookeeper to
submit tax returns online does not remove the employers responsibility who
would be liable to a penalty fine by the tax authority if the submission was
About the Author
Terry Cartwright, CEO at DIY Accounting, designs Accounting Software for
small to medium sized businesses
http://www.diyaccounting.co.uk/ and Paye Payroll Software packages for up to
20 employees at
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Article Published/Sorted/Amended on Scopulus 2008-01-14 00:11:51 in Tax Articles