Wages Salaries And Paye Administration
Submit Articles Back to Articles
The PAYE system is a payroll administration system where employers deduct
income tax and national insurance contributions from employees. Paye was
introduced by the UK in 1944 as a tax system by the inland revenue which
employers administer to deduct from employees wages and salaries income tax and
national insurance contributions
Every employer in the UK must register as an employer with the tax authority.
Register to administer a PAYE scheme is obligatory if the employee has other
paid employment or has earnings at or above the PAYE threshold and liable for
deductions of income tax, or has earnings at or above the national insurance
lower earnings level. Registration can take place up to four weeks before the
first qualifying employee is engaged.
The paye system is a scheme whereby employees are deducted income tax and
national insurance on a weekly or monthly basis according to the frequency of
wage and salary payments by the employer who then pays the income tax and
national insurance contributions over to the inland revenue in the UK each
The employer is also responsible for keeping a record of the employers
national insurance contributions which together with the employee deductions are
paid over to the tax authority on or before the 19th of the month following the
pay period. Small business that has a quarterly liability to income tax and
national insurance less than 1,500 pounds per quarter can arrange to pay the
PAYE every three months rather than every month.
Tax is deducxted according the a tax code which indicates to an employer the
tax to be deducted from an employee and any special conditionsa that should be
applied in calculating the income tax. Every employee receives a tax code which
usually consists of a number indicating the amount of tax free allowances that
employee is entitled to and one or more letters to indicate any tax conditions
that should be applied. Special conditions and circumstances for each employee
is usually representing in the tax code with a letter known as a suffix to the
prefix tax code number.
The financial tax year in the UK is from 6 April one year to 5 April the
following year with each tax year divided into 53 specific week numbers that
accounts for days over at the end of the year and also into 12 monthly periods.
Income tax deducted is calculated by the employer operating the PAYE scheme on a
cumulative basis during the tax year by using either manual tax tables or a
payroll software package. The tax code is devided throughout the year into
weekly and monthly amounts to produce a tax table.
To calculate the income tax the employer determines the cumulative tax free
allowance in a specific week or month and deducts this allowance from the
cumulative gross pay that employee is due at that tax week including current
wages or salary and all previous income earned during the current tax year
including any earnings from other employers. Having established the taxable pay
that amount is then applied to the percentage of income tax to be paid under the
current tax rules for that financial year.
The employer is responsible for deducting the correct amount of income tax,
issuing the employee a payslip to advise the income tax deducted and also for
paying the income tax deducted to the tax authority. The PAYE calculations and
production of payslips is an essential function of payroll software that many
employers adopt to ensure accuracy and compliance with the regulatory bodies tax
The second major area of PAYE administration is for employees to deduct
national insurance contributions from employees. National insurance
contributions are calculated not on a cumulative basis as income tax but are
calculated according to the gross income earned in a specific pay period based
upon the gross pay during that weekly or monthly pay period.
The amount of national insurance deducted is determined by looking up the
employee gross pay on a national insurance deductions table. A different
national insurance table is applied according to the personal circumstances of
the employee. In addition to the employee national insurance contribution each
employer also has to pay an employer national insurance contribution.
PAYE administration is a series of payroll and deductions documentation
related to the payment of wages and salaries to employees. The majority of
businesses use payroll software to automate the calculations and produce the
information required for the PAYE returns.
The starting point of the PAYE system is the P45 which all employees receive
when they leave an employment and is a certificate of the cumulative gross pay
and income tax deducted up to the date of the P45. Details from the P45 also
include the employee tax code that must be entered into the employee PAYE
records to enable the new employer to calculate the income tax due to date.
If an employee does not hand the new employer a P45 then they are taxed on a
week to week basis until the tax code and cumulative income tax position are
known. Confirmation of an employee tax position is obtained by the new employer
by submitting a P46 form to the Inland Revenue when an employee does not have a
It is a legal requirement incumbent on each employer to issue every employee
with a payslip that must show the amount of gross pay, deductions from that pay
and the net pay. In additional the employer also needs to maintain records of
payments to the employee and deductions made. Payroll software can produce these
records and the Inland Revenue also provide small employers with a P11
deductions working paper for this purpose.
Having accumulated and recorded the financial information throughout the
financial year sveral documents must be prepared and submitted by the employer.
Each employee has to be given a P60 certificate of earnings and deductions
during the financial year. The P60 is an important document and often required
for many diverse purposes unconnected with the PAYE system such as future
mortgage applications and other purposes as proof of income.
The employer also has to complete a P14 for each employee which is the form
on which the employee deductions and statutory payments are recorded. The P14 is
the document each employer has to complete for each employee advising HMRC the
In addition every employer also has to complete a P35 which is the Annual
Employers Return which lists the name of every employee, the income tax deducted
and national insurance liability including employee and employer contributions.
The P35 also includes statutory payments made to employees and the amount of the
employer has already paid to the Inland Revenue. In the UK employers can receive
a tax free bonus for filing the P35 details online.
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
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2008-01-14 00:11:51 in Tax Articles