What is PAYE (Pay As You Earn)?
PAYE stands for Pay As You Earn and refers to HMRC's system of collecting income tax and national social security contributions from wages. If you are an employer or employee, PAYE affects how you collect or pay taxes.
How Does PAYE Work?
Employers administer PAYE as part of their pay, deduct tax, and NI before paying an employee their wages. Other deductions, such as pension contributions or student loan repayments, can also be processed via a payslip.
Employers notify HMRC of all awards and deductions using the payroll software to submit full payment (FPS). The information is used to calculate the employer's PAYE bill so that they can pay the deductions to HMRC.
If someone else (such as an accountant!) processes the payslips on behalf of the employer, he/she will send the ACC on his/her behalf and then let the employer know how much PAY he/she owes.
Who Pays PAYE?
Most people pay income tax through PAYE. It is the system that your employer or pension provider uses to collect income tax and social security contributions before they pay your salary or pension. Your tax code tells your employer how much to withhold.
What is My PAYE Number?
When you register as an employer, HMRC sends a welcome packet to the employer with your PAYE reference number. If you lose it, you can also find it in letters or emails about PAYE from HMRC. It also appears on all P45s or P60s for past or present employees.
How Do I Register as an Employer for PAYE?
You apply for PAYE (Pay As You Earn) when you register as an employer with HMRC. You must register before hiring staff or subcontractors for the first time!
Why is PAYE Withheld?
PAYE essentially allows employees to pay tax and NI of their pay in installments instead of receiving a scary tax bill at the end of each year. The rates are calculated on the basis of an employee's estimated income during a financial year, taking into account his personal allowances.