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Guides: Payroll

An Employer's Guide to Payroll

Payroll Guide Contents > Payroll and PAYE

2. Payroll & PAYE

The PAYE System

PAYE provides for income tax to be deducted from pay and aims to ensure that, as far as possible, the deductions of tax reflect the correct amounts due from the employee having regard to their circumstances as a private taxpayer.

The allowances and reliefs to which they may be entitled by reference to their personal circumstances are converted into a PAYE Code that is notified to the employer by way of a Notice of Coding.  It is this PAYE Code that determines the sum of tax the employer must deduct. When registered as your agent for payroll we receive a copy of the notice directly.

The employer is provided with a set of tax tables to use with the PAYE code to calculate the tax due. The tables release the tax-free allowances over the course of the year, by reference to tax weeks or months as appropriate, to ensure the employee is taxed on a level basis throughout. Because the tables work on a cumulative basis throughout the year, the amount of the tax payable will reflect the earnings to date and, if the earnings fluctuate, the tax deducted will also fluctuate.  On occasion a refund may arise. 

The PAYE coding is a device to enable the employer to deduct the correct sum of tax while maintaining the employee’s privacy. The employer is not authorised to enquire into it - he merely has to operate the code.  If an employee disputes the code or the tax being deducted he must take it up with his Tax Office directly.

An employee joining from other employment will usually bring with him a P45, an interim Certificate of Pay and Tax Deducted to date, from his previous employer, which also gives the PAYE Code number the new employer must use.  If the employee does not have a P45 or it is their first employment, tax must be deducted at basic rate with no allowances until a form P46 is completed and a code obtained for them.  When they leave the employer must in turn provide them with a P45.

National Insurance (NI)

In addition to tax, employees must pay Class 1 NI contributions on their earnings, known as Primary Contributions, and employers are obliged to pay a contribution known as a Secondary Contribution.  The latter is in fact a payroll tax on the employer i.e. it is a cost to them. It is collected through the PAYE system together with the tax.  The cost to the employer of any employee is therefore the gross wage paid plus the employer’s NI contribution.

In addition, employers must pay Class 1A NI contributions on certain benefits provided but which are not paid through the payroll (see Guide to Other Employment Compliance Issues).

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Disclaimer

While we hope the above has been found to be useful it is intended only as a general guide, may not reflect the very latest developments in law, and cannot be a substitute for professional advice. We cannot accept any responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this guide.