PAYE Implications for Contractors and people Contracting in the UK
PAYE Definition
Define PAYE: PAYE is UK term relating to a tax deduction for the Government made by the employer from an employees earnings. It is an abbreviation for “Pay as You Earn”
PAYE is a tax deduction that has to be made from your pay if you are an employee.
PAYE is an automatic deduction from your gross pay by your employer that is then paid over by them to the Inland Revenue (HMRC). If your only earnings in a tax year are from your wages it helps ensure your tax has been paid in full (and therefore removes the worry or stress of having to do tax returns or save up for your tax bill).
PAYE thresholds (above which tax is payable) are: £116 per week or £503 per month.
(Personal Allowance £6,035).
Tax Rates that apply:
- 20% up to £34,800
- 40% over £34,800
PAYE Wikipedia Definition:
an amount collected by employers on behalf of the government from employees. This is, in effect, a provisional payment of tax on the employee’s income. The amount withheld is determined partly by the employee’s expected tax allowances, exemptions and relief’s, and partly by tax tables that determine the amount of tax to be deducted for the salary or wage paid to the employee.
PAYE as a system is also used to collect national insurance and or medical insurance contributions plus other social security contributions.
The tax collected during the year may be enough to discharge the taxpayer’s liability for tax, making a tax return redundant. However, if the taxpayer’s affairs are complicated, a tax return may be required to determine the amount of tax payable or refundable.
PAYE is, in effect, a withholding tax administered separately by the tax authority. As the tax man is a fact of life, all forms of income attract the attention of the tax collector, and administrative arrangements are put in place to allow for the smooth payment and collection of taxes.
PAYE for Companies
PAYE Company Payroll. Dealing with Payroll and PAYE can be an administrative burden for small and medium size businesses (SME‘s). Often the owner or a member of senior management is left to do it which can prove a drain on their time and a frustrating task (where you only receive feedback if something is wrong (and then only if it’s to the detriment of the employee!)).
For this reason many SME’s use the services of a Payroll Bureau where you benefit from having a large department specialising in payroll dealing with your payroll run, payslips, BACS payment and monthly tax returns and payments for a fraction of the cost of setting it up yourself.
We work in association with PayMatters (Accountants) LTD who can provide this service for you.
For free advice please call them on 0800 121 6513.
For larger businesses it is often more beneficial to set-up your own department to deal with pay in-house.
Key Forms and Dates:
HMRC have produced the following guidance on PAYE Tax Forms:
Employee forms
- P45. A P45 summarises your earnings and tax deductions from your previous job.
- P46. You complete a P46 if you don’t have a P45.
- P60. A P60 is issued for all employees who were employed on the 5th April (last day of tax year) whose earnings reached the National Insurance Lower Earnings Limit during the tax year. The P60 shows the employee’s pay and tax for the whole year.
Start of tax year forms
- P9(T), P9X. These tell you about the tax codes to use for your employees for the following tax year - from 6 April.
- P7X. This form tells you about any more changes that you’ll need to make to your employees’ tax codes as a result of a recent Budget. These changes usually apply from May.
Payroll administration forms
- P11 Deductions Working Sheet. You use form P11 for each employee to record details of their pay and deductions throughout the year.
- P14. At the end of each tax year you must complete form P14 for each employee whose earnings reached the National Insurance Lower Earnings Limit. This is a summary of the information you’ve recorded throughout the year on each P11. You must send this to HMRC, to reach them no later than 19 May.
- P35 Employer Annual Return. You list details of all your employees on form P35 and the amount of Income Tax and NICs you’ve deducted from each of them. This form must also reach HMRC no later than 19 May.
Expenses and benefits forms
- P9D, P11D or P11D(b). You use these forms to tell HMRC about all the taxable benefits or expenses your employees have received. Use form P11D for company directors and employees who earn £8,500 a year or more and form P9D for employees who are paid less than £8,500. Use form P11D(b) to enter details of the NICs due on the benefits that have been recorded on the P11Ds. You must send all these forms to HMRC by 6 July.
- P11D(X). You can use this form to apply for a dispensation to cover the benefits and expenses you pay to your employees. If we give you the dispensation, you won’t have to put details of the expenses and benefits it covers on forms P11D or P9D.
- P46 (Car). You use this form to tell HMRC if you give an employee the use of a company car - or if they change the car that you provide for them.
Cheque Payments for the month ended the 5th need to be made by the 19th of the month. For electronic payments you can pay by the 22nd.
PAYE for Contractors
IR35 was introduced to ensure the majority of contractors paid tax along similar lines to employees performing similar roles at similar hourly rates. Prior to it’s release contractors could pay significantly less tax by being paid through intermediaries such as Partnerships or Personal Service Companies.
If a contractor is caught by IR35 they have to have tax (PAYE and National Insurance Contributions (NIC’s)) deducted from their pay as “deemed employees”.
To avoid the implications of IR35 many contractors either set-up their own limited company or join an Umbrella Company.
PAYE Umbrella
A PAYE Umbrella is a company that a contractor can join to help clarify their employment status. Many recruitment agencies and companies that use contractors require contractors to be members of Umbrella’s so that they too cannot be penalised for treating contractor costs incorrectly.
With a PAYE Umbrella you become an employee of the Umbrella Company. You still look for new work but the contract for the work is between the Umbrella and the end client or recruitment agency. Each week or month you submit a timesheet for time spent and costs incurred. The Umbrella invoices for services provided and collects monies due. It then deducts it’s margin and passes the profit from the job onto you after accounting for all relevant taxes.
A benefit that is often promoted by Umbrella Companies is that your PAYE can be reduced by claiming for expenses you have incurred but not been reimbursed for i.e. travel, subsistence, accommodation.
We work in association with the Umbrella Company PayMatters LTD.
For FREE advice on Umbrella Companies please call them on 0800 121 6513.
PAYE Calculator - Income Tax Calculator
HMRC provide a free to use PAYE Tax Calculator
PAYE Advice
For Free PAYE Advice please call PayMatters on 0800 121 6513. For customer service for existing clients, please call 0844 335 0169.