Everything You Need To Know About PAYE Registration
The HMRC deducts national insurance contributions and income tax from employees in form of PAYE. Other deductions that are categorized as PAYE include student loans and pension contributions if any. All these deductions are made on a monthly basis during the preparation of employee payrolls.
As an employee, you have a tax code which entails all your details that guide your employer how much PAYE should be deducted from your salary. The tax code is also beneficial in that it takes into account all your taxable state benefits and deducts them automatically from your income. However, in case you don’t have any extra income and you only earn from the state pension, then the HMRC will write to you and you may be required to fill in the self-assessment return.
How to register as an employer
When a business starts, it is required to register with the HMRC as an employer the moment it hires employees even if it is only one employee. The registration should be done in advance before the business makes its first payments. During registration, the employer is expected to provide all employee details as well as those of the business. It is after registering the business and employee details that the company can create a payroll system, prepare returns, pay the HMRC, and pay the employees.
Although you are supposed to register as an employee the moment you hire the first employee, there are other requirements that you are expected to meet. These include;
- The employee should be earning equal to or more than the PAYE which is £11,500 per years as per 2017/18 tax laws. The National Insurance Lower Earning should be £5,878 per year.
- The employee should be getting employee benefits such as company car and insurance
- The employee has another job or is getting income to inform of pension from the government, another company or occupational insurance
You can register for PAYE online services at any time you want as long as you do it in advance before the first payment day. As long as you meet the above requirements, it doesn’t matter whether you have one employee or several, it is necessary that you register as an employer with the HMRC as it is only after registration that you will be able to create your payroll system.
The HMRC has not stipulated the exact date when the registration should be done. However, it is always advisable to do it in advance as it takes approximately two weeks to get the PAYE reference numbers. When registering, avoid doing it 120 days before the first payday because if you register and don’t pay the HMRC anything, then your registration will be canceled automatically. In most cases, online registrations with the HMRC are the ones that are prone to automatic cancellation. There are cases where you may need to consult the HMRC Customer Operations Employer Office or call the customer service. These cases include;
- When you have an unusual business structure such as a limited liability partnership that has 110 or fewer directors who are not qualified for National Insurance or do not reside in the United Kingdom.
- If your company has unusual payment structures such as when you are running an off-shore company or have a profit-sharing scheme
How employers deduct PAYE tax
The HMRC provides all the employers with tax codes that guide them in understanding how much PAYE they should deduct from each employee. In case the HMRC doesn’t have enough information about the employee PAYE details, then the employer is expected to use the emergency tax code while deducting PAYE until the department will get enough information about the employee and adjust the deductions accordingly.
When filing for HMRC PAYE for employers, the employer is provided with a tax code which is found on;
- The payslip
- Mailed to you via your tax office
- Pension statement in case you are receiving an occupation pension
In cases where the employer has not been provided with an employee tax code, then the HMRC provides the employer with an emergency tax code that he can use when deducting PAYE. Taxing on emergency code stops as soon as the employee gets a tax code. The deductions are also adjusted and the details provided to the employer. In case there are overpayments done when the employer was using the emergency tax code, the money is refunded. Similarly, the employer is notified in case there were any under deductions and the HMRC advises on the right amount that should be deducted to ensure the PAYE is adjusted.
What is Employer Reference Number (ERN)
When register with the HMRC as an employer, you are provided with a unique number known as employer reference number. The number is used by the tax department and other legal entities to identify your business in midst of other employers. The ERN is a unique combination of letters and numbers and contains two parts which include three digits that represent the HMRC office number and a reference number that is unique to your business. When there are many circumstances where you may need an ERN, the number is most important while you are filing your end of year PAYE returns. Failure to have the number included in the returns is one of the major reasons where many tax returns are rejected by the HMRC. You will also need the employer reference number when;
- Applying for a student loan
- Applying for tax credit
- When buying an employer’s liability insurance
As important as the ERN sounds, there are a number of employers who do not require it. These exceptions include;
- A business that doesn’t have any employees
- A business that has employee who earns below the PAYE threshold and meets certain requirements
- All business registered outstand England, Wales, Northern Ireland, and Scotland. Such businesses include those registered in Jersey and Guernsey.
Before you rule out that your business doesn’t require an ERN, it is important to consult with the HMRC.
What to do in case you lose your ERN
Your ERN is very useful throughout the tax year which is where you need to ensure that you have it at your fingertips. In case you lose it, you should consider using employer PAYE reference example like a checker, finder, and lookup to ensure you have it when filing your returns. You can also rely on any PAYE correspondence from the HMRC, P45 and P60 forms of your former employees. In case you go through all the records and realize that you don’t have the number, there are high chances that you are not registered and you should do so as a matter of urgency before you make your first employee employment.
How to set a PAYE for a limited company
If you are running a limited company, then your accountant should help you with setting a payroll system that reflects the PAYE number of all your employees. Use the following steps when you are ready to set up a PAYE system for a limited company;
- Ensure that you have registered as an employer with the HMRC
- Ensure that all your employees are registered with the HMRC. In case you don’t have their tax codes, you can initially use the information contained in their P45 form.
- Ensure that your accountant is using accounting software that automatically transfers all the information to the HMRC automatically.
- In case your employee owes the HMRC any taxes, you must ensure the debts are paid within the specified time.
How PAYE schemes work
Once you have registered as an employer with the HMRC, you can easily apply for the PAYE scheme online. After application, you will be provided with a unique PAYE reference number by the HMRC. You accountant will use the latest accounting software to set up your limited company’s payroll number. To ensure that you have done accurate PAYE calculations and NIC deductions for all your employees, you will need to use the P45 to get the tax code for each employee.
The monthly payslip for your employees should include the gross income, net payment, and all the deductions for the income tax. Your accountant will also ensure to include the PAYE number on payslips. There are deadlines when the income taxes should be paid and that’s why it is necessary that you work with a qualified accountant when preparing your monthly payroll.
In case you are submitting your tax returns manually, you have until 19th of every month to submit but if you are submitting online, you have until 22nd of each month. In case your income doesn’t reach the PAYE registration threshold, then you need to file nil returns to avoid penalties by the HMRC for failing to submit. Also, in case you add new employees in your company, you have to make sure you add them to your payroll system and ensure you prove the P60 at the end of the tax year.
Some common questions that you may ask yourself about PAYE scheme
Is it mandatory that I set a payroll system?
If you are running a sole proprietor and you don’t have any employees, then you are the business and there is no need to register for PAYE scheme. However, if you run a small business and have even a single employee, then you should register for the scheme.
Are company directors considered employees?
As a director of a limited company, you are viewed as a separate entity from the company and hence you are an employee. In this case, the company is your employer and you are the employee.
What is the process of setting up a payroll?
The first thing you need to do is inform the HMRC that you are an employer. After doing this, you will be provided with an employee reference number which you will use to register for a payroll system.
How much salary should I pay the members of my staff?
The decision on how much you should pay your employees is entirely up to you. However, you need to make sure you reach at least the National Minimum Wage and especially if you have signed a contract. If you have directors, then you can pay as much as the company can afford since there is no contract signed.
How much salary should you pay yourself?
Although the decision on how much salary is for you, it is wise to maintain your salary within the annual personal allowance tax to avoid wasting the allowance and also maintain the State Pension. You can further save on tax by making the rest of your income dividends.
How often should you pay your employees and the HMRC?
This decision is based on your business cash flow in which case you can pay daily, weekly, bi-weekly or monthly. Whichever frequency you choose, you need to make sure that it is the most suitable for your business. Also, avoid choosing a frequency that might end up being too hard for your business cash wise.
Can I fill my payroll online?
The definite answer to the question is yes. Completing your payroll system online is beneficial in that your accountant will do it in a timely manner and accurately hence ensuring your employees are never disappointed due to late payments. In addition, you will never get into trouble with HMRC for entering wrong details when filing your returns.
When it comes to PAYE registration, it is always wise to work with a professional accountant who understands what the system entails and how it works. When preparing your company’s payroll, there is a lot of deductions involved which might prove too complicated to handle on your own? Hiring a freelance contractor has the following benefits;
- A contractor charges as per work is done which is cheaper compared to a hiring a fulltime accountant
- Your payroll system will be done in a timely manner in which case you will never be late to pay your employees and also you will be filing your tax returns in a timely manner.
- A professional accountant will also assist you with bookkeeping tasks
- When filing your taxes, an accountant can offer you other services such as assisting with auditing, preparation of monthly financial statements, customizing your chart accounts, and creating an interface between your business and the payroll system.