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Payroll Taxes in the UK - An Entrepreneur’s Guide

Not only have you managed to launch your own business, but you’ve also started making your first hires.

Congratulations! That’s a huge step for any fledgling company.

Taking the next step, from being a one-man-band, to becoming a team does bring certain requirements and responsibilities with it.

Some of these will be more straightforward such as, adapting your workspace, or introducing online team-management software.

However, one of the most important, and perhaps more complex areas relates to the payment of salaries.

Salary is normally high up the list (or at the top) of priorities for new employees, and they will almost certainly expect to be paid in a timely and accurate fashion with all relevant taxes accounted for.

For those entrepreneur’s with little financial background, this can be daunting, but this guide to payroll taxes in the UK should help clarify some of the key aspects.

Read on for more.

PAYE: Pay As You Earn

PAYE (Pay As You Earn) is the method for ensuring your employees pay the right amount of income tax and National Insurance.

With PAYE, tax and National Insurance is deducted from pay packets before they’re issued, so each employee receives a net amount and doesn’t have to pay any further tax on that income.

PAYE is very much universal – you’ll see businesses of all sizes using it as part of their payroll systems.

National Insurance

The principal tax associated with payroll is National Insurance or NI.

NI is the contribution that workers make towards certain state benefits. If you had a job before starting your own business, you’ll have probably paid National Insurance as an employee.

Do note, though, there are different rules for self-employed freelancers – so it is well worth getting up-to-speed. The employee’s contribution is deducted by the employer, from their salary, while the employer’s contribution is an additional cost to the business.

The NI that employees pay depends on their employment status and earnings, as well as whether they have any gaps in their National Insurance record.

At present, an employee’s NI is charged at a rate of 12% or 2% dependent on level of earnings, and employers’ NICs are charged at the rate of 13.8% of the gross salary paid to the employee.

Sound a little complicated? Well, it is manageable, but most business owners find automated PAYE software or use of a small-business specialist accountant preferable to managing their own payroll taxes.

Income tax

Another key tax related to payroll is Income Tax, which is the tax paid on the money earned from employment.

The rate you pay increases as you earn more, although most people have an annual, tax-free allowance.

NB: When managing income tax through PAYE, you should consider every employee’s salary or wages, as well as tips, bonuses, sick pay, or maternity pay.

Other deductions

This isn’t a tax but is something that should be managed as an employer through PAYE.

Firstly, let’s look at student loans.

Students going to university can borrow money from the Government to cover university tuition fees and to help with living costs at university. 

When they finish their course and start working as soon as they earn over a specific threshold, they need to start repaying their student loan and this is paid by the employee as a payroll deduction from gross pay.

Secondly: Pensions.

As a UK based employer, the company must have an auto-enrolment pension scheme in place should its employees wish to join or not (they will be automatically opted in but have the option to opt-out).

Managing PAYE

You need to use PAYE if any of your employees earn in excess of £116 per week, claim expenses or receive employee benefits, or receive pension contributions from you.

Even if you don’t need to use PAYE but you do employ people, you need to be keeping payroll records in any case.

To find out how much income tax to deduct from each employee, you’ll need to know their tax code. The Government has an online tool for finding out an employee’s tax code. This process is slicker if you have their P45 (issued by their previous employer, if they had one).

National Insurance works a little differently, but also uses a code-based system.

Enter each employee’s tax and NI codes into your payroll software, or provide them to your accountant, and the appropriate deductions will be made.

Over the years, we often see business owners making these mistakes with PAYE:

  • Adjustments – not calculating changes in pay, such as pay rises, bonuses or overtime
  • Incorrect details – not outlining expenses, sick pay and pension payments
  • Tax codes – using the wrong codes for employees
  • Employees leaving – forgetting to take them off the payroll.

If you can navigate these pitfalls, your life – and the lives of your staff – will run much more smoothly with regard to HMRC.

If the above all sounds too much – reach out for specialist support from a small-business accountant.

Payroll Taxes in the UK - An Entrepreneur’s Guide

Watching your business grow is exciting and adding to your staff is one of the most thrilling aspects of this.

We admit, it doesn’t come without additional work – and some worry.

However, if you can stay on top of PAYE, as detailed above, you’ll be alright.

Once again – if you’re at all concerned, reach out to a small-business accountancy firm such as Howlader and Co. They can talk you through the requirements in greater detail and set out a plan for managing payroll taxes on your own, or with their support.

Good luck!