An employer’s guide to payroll tax
So you have accomplished your dream and are now the proud owner of a limited company. You are your own boss, and you may well already be somebody else’s. With that comes a host of responsibilities, from insurance to wages.
You are not only responsible for paying your own taxes, but all of your employees’ too. It can seem daunting at first. But once you understand how PAYE works you might feel a little more at ease.
The Pay As You Earn (PAYE) system is HMRC’s way of collecting income tax from those in employment. They deduct national insurance contributions from your employees’ wages or occupational pension before you pay them the rest of the money. How much money is given to HMRC depends on their tax codes.
Setting up PAYE
If you decide to take on the task of payroll yourself, there are some fundamental aspects you will need to consider before you even pay them. Do you know how often you are paying them? Do you know when? Your employees will want a concrete schedule, so they know when to expect their wage, be it the last day of the month or every four weeks.
Beyond that, there are other areas you will need to focus on:
- Make sure you register as an employer with HMRC. You will then receive a login for PAYE Online.
- Choose a good payroll software. HMRC has compiled a list of suitable free and paid payroll software suitable for UK businesses.
- Collect and keep records of what you pay your employees and the deductions you make, reports and payments you make to HMRC, employee leave and sickness absences, tax code notices, taxable expenses or benefits, and Payroll Giving Scheme documents.
- Tell HMRC about new employees so you can work out their tax code and find out if they need to repay a student loan.
- Record pay, make deductions, and report to HMRC on or before the employees’ first payday in a Full Payment Submission (FPS).
- Pay HMRC the tax you owe every month online, by telephone, by debit or credit card, direct debit, or cheque through the post.
Your payroll software will take care of much of the heavy lifting when it comes to tracking payroll and taxes, but you need to make sure you are carrying out all of these steps every month for every employee.
How do you pay tax?
If you are a sole trader and self-employed, you will be liable to pay your tax through a self-assessment.
If you are self-employed, you must report your income for the tax year by the tax return deadline. This means you need to manage your accounting effectively, so you are ready to pay the correct amount of tax for the year.
If you run a limited company and take a salary, you are an employee, even if you are the director. You will need to pay tax through the PAYE system. If you don’t, this can lead to serious legal issues. But, as a business owner you may be liable to pay the following taxes:
- Income tax
- National insurance
- Corporation tax
- Value Added Tax (VAT)
- Stamp duty
- Capital gains tax
The HMRC tax payment schemes and methods are complicated. You need to make sure you have a full understanding, so you don’t end up paying hefty penalties if you don’t use PAYE correctly. It is best to speak with a qualified accountant who can make sure there is no confusion surrounding your business taxes and ensure everything is filed correctly. That way, you will be able to relax knowing you are working well within the law and your accountant is making sure you are not paying more than you need to.
Big Hand is always here to help lighten the load when it comes to your business finances, including payroll tax. Get in touch with us today on 0161 327 2911 to see how we can help you do more.