How The PAYE System Works Accounting Essay

PAYE ( Pay As You Earn ) – This is the sum of money collected by the employers from their employees through tax write-offs to pay for their income revenue enhancement. The employer collects the money on behalf of the authorities and makes payment to the authorities on peculiar periods, for illustration, on monthly footing, on hebdomadal footing or even quarterly a twelvemonth. The sum of PAYE money that an employee has to be deducted is determined partially full revenue enhancement twelvemonth, and besides partially by the employee ‘s expected other income. All employees ‘s expected income including expected allowances and alleviations are translated by HM Revenue and Customs ( HMRC ) into a “ revenue enhancement codification ” . Tables which are published apply the revenue enhancement codification to set up sum of money to be deducted as revenue enhancement ( Chittenden et al 2005 ) .

Workers have to inform the HMRC about the transmutation which will act upon his or her payments every bit good as alleviation and other income in the revenue enhancement twelvemonth. Sending the levy by usage of HMRC is the responsibility of the worker or the employee.

Her Majesty ‘s Revenue and Customs ( HMRC ) this is a non ministerial section of the authorities that is responsible for revenue enhancement aggregations some other signifiers of province support.

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Tax codification is the codification allocated to each revenue enhancement remunerator by the HMRC in order to place them. It consists of Numberss followed by a missive postfix but other non criterion codifications are besides used. Tax codifications are changed annually, but in other fortunes, they can be changed before the terminal of the twelvemonth. For illustration, when a revenue enhancement remunerator has changed occupations, or there have been alterations in their income, the revenue enhancement codification for this individual can be changed ( Small Business Research Trust 1998 ) .

An employee who is altering occupation is given a signifier which contains information needed by the new employer to run his PAYE right and easy. At the terminal of every revenue enhancement twelvemonth, every employer is supposed to give his/her employee from P 60 which is used to put out employment income and the PAYE revenue enhancement with held with the class of the stoping twelvemonth.


History of PAYE

PAYE was devised by Paul Chamberss and introduced to UK in the twelvemonth 1994. During those times, there were fiscal strains in the UK brought by the Second World War and this meant that, the authorities needed more money from the people to assist in the smooth running of the authorities ( Carter 2001 ) . The debut of this revenue enhancement system was a challenge to both the employer and the employee because they had non used the system before.


Tax or responsibility construction faced a challenge when it could non cipher revenue enhancements of the people who had more than one occupation. It was besides really difficult to do corrections and besides have seasonably treating due to the fact that, different offices from different employers were involved and non all of them could do effectual communicating ( Johnsson 2004 ) . In the twelvemonth 2010, the UK authorities introduced the usage of computing machines which has led to big volumes of corrections.

How the PAYE system plants

Before puting up a PAYE system, you need to register with the HMRC foremost. After you have registered, you can so put up the PAYE system if you have employees. But if you are limited company, so you become the employee yourself.

The employees gaining more than ?7,475 hold to be deducted the income revenue enhancement in every terminal of the twelvemonth. Employees aged16 old ages or over are deducted the national insurances parts. Those employees gaining more than ?110 a hebdomad ; have to be deducted under province pension in the revenue enhancement twelvemonth 2010/11.PAYE as you earn is applied to all rewards, all payments and all beginnings of income ( Godwin et al 1989 ) .

How to put up a paysheet system

In order to put up a paysheet system that will be used in ciphering employee PAYE from their wages, employers can utilize: –

An employer can use an comptroller who will be able to make all the computations within the company. This is the easiest manner of ciphering the income revenue enhancement, but there is besides possibility of many mistakes being made by the comptroller.

An employer can happen a paysheet bureau that can execute the occupation, but the employer should ever retrieve that, they are supposed to take duties of any errors made. Therefore, if the paysheet agent makes any errors, the duty will non be on the agent but on the employer.

The employer can make up one’s mind to make it themselves. If one decides to make it himself, they will necessitate to utilize the followers:

They will necessitate paysheet package which must foremost be approved by the HMRC before being used.

You will besides necessitate the employer CD-Rom. This one you get together with your employer starting motor battalion and it includes databases and reckoners that will assist you in making and keeping paysheet system and besides will assist you in computations of income revenue enhancement and other tax write-offs that need to be done.

A manual reward record is besides needed- This will besides assist you in computations of all the tax write-offs that need to be done. This is done utilizing a paper and it may sometimes convey concurrences in the record although sometimes it makes things clearer.

How and when to pay

The employer pays the HRMC the revenue enhancements that he has deducted from its employees harmonizing to what they have calculated. One may besides do payments monthly, merely when the payments are non more than ?1,500, one may make up one’s mind to do payments quarterly. If you normally make your payments utilizing electronic methods, you have to pay by 22nd of every month. If you do non utilize electronic payments, you have to do the payment by 19th of every month. One can pay online so long as you have less than 250 employees. This can be done by debiting straight, usage of giro bank, Post Office cashing, every bit good as utilizing a check. Every unpaid or due balances have to be paid to the HRMC by April 19 in any revenue enhancement twelvemonth.

Forms needed for PAYE

There are different signifiers that need to be filled by both the employer and the employee. These include: –

Tax write-offs Working Sheet P11: Its purpose include demoing tax write-offs of pupil loan, NI and revenue enhancement for illustration sick, pregnancy, acceptance, etc. This signifier can besides be used to enter your rewards and is supposed to be started at the beginning of every revenue enhancement twelvemonth and should be maintained through out the revenue enhancement twelvemonth. In instance the employer hires a new employee, a new tax write-offs working sheet should be started because of this new employee.

P32: This is the signifier that keeps all the elaborate records on the entire payments done and besides all the tax write-offs done for a certain period of clip. One may make up one’s mind to do it hebdomadal, or monthly. One needs this in order to enable you stick to the HMRC regulations and besides assist you in make fulling the P35 signifier.

Employee wage faux pas: This signifier does non arise from the HRMC but this should be created for each employee in the company every clip they are being paid. The employee wage slips contains the followers:

Gross rewards: -This is the entire salary before any tax write-offs have been made on the wage.

Entire tax write-offs: – This will demo all the tax write-offs that have been made on the gross salary e.g. the income revenue enhancement, any loan that the employee may hold taken and any other tax write-offs that must be deducted from the employee ‘s wage.

Net rewards: – This is the staying wage after all the tax write-offs have been made. It calculated by ; gross rewards – the entire deductions= cyberspace rewards.

P35: This is form shows the employer ‘s one-year return. It shows the entire PAYE tax write-offs for all the employees. The signifier has a room for merely 10 entries, hence, if the employer hires a new employee, he needs to acquire a P35 ( CS ) continuance sheet so as to suit this new employee

P14: This signifier contains the information for each single employee. It shows all the entire payments that the employee has made through out the revenue enhancement twelvemonth.

P60: This is a transcript of the P14 that the employer gives the employee to maintain as grounds that they have paid all their income revenue enhancements within the class of the revenue enhancement twelvemonth.

P11D: This where all disbursals and benefits in sort for the employee are recorded.

All new employees need to direct a P45 signifier to the HRMC. All the signifiers explained above can be gotten from the HRMC order line, or you can besides be downloaded from the HRMC web site.

How employers do make fulling

There are several inside informations that have to be filled by the employers in order to be able to do revenue enhancement payment easy. Once on the on-line page, the page provides different infinites where right information has to be filled. This signifier works as a reckoner that can cipher the entire tax write-offs that need to be done on an employee ‘s entire income. The following inside informations have to be provided in that page.

Choice Year: The revenue enhancement twelvemonth is normally displayed by default by the reckoner. For illustration, this revenue enhancement twelvemonth is 2010/11. Each revenue enhancement twelvemonth in the UK starts on April 6th every twelvemonth.

Married: – This helps the reckoner to cognize who may hold an increased revenue enhancement free allowances, for illustration, married twosomes aged 65 old ages old may hold an increased revenue enhancement free allowances and do non pay the national insurance.

Blind: – There is an extra allowance that is made available for the unsighted people. The employer should snap this if they do non desire to include the national insurance parts in the computations.

Student Loan Repayment: – Students who had taken loan during their surveies will necessitate to get down refunding the loan. However, this is merely done after their net incomes have gone above a certain threshold. Take for illustration, this twelvemonth threshold starts at ?15,000, and hence pupils gaining this much have to get down refunding their loans. Click on this option if you want to include the refund of the pupil loan.

Age Group: – Persons over the age of 60 old ages and are still employed acquire some extra allowances, and besides reduced figure of National Insurance parts.

Extra Allowances / Tax write-offs: – If there are any other extra allowances one wishes to include, they should be indicated here. If you besides have any other tax write-offs you would wish to add they should be indicated here.

Tax Code: – It is optional to add your revenue enhancement codification but if you know it, you should bespeak it.

Gross Income per Year / Month / Week / Day: – One should choose the clip for which they will be doing the payments, different periods are provided for the user to take.

Wage Summary: – This helps you to choose the column from which you want your pay sum-up to be displayed ( Cowe 1997 ) .

Pension: – If you are presently on pension, enter the sum that you pay for your pension in regular footing.

Email Address: one time the electronic mail reference is entered, all detailed are saved and can be used for the following clip.

PAYE system of revenue enhancement aggregation versus the self-assessment system

While roll uping income revenue enhancement, there is ever a challenge when it comes to people with more than one occupation or people who are non employed but work for themselves. Most of times, it becomes difficult to utilize the PAYE system and hence, a self-assessment is used in order to do certain that these people besides pay for their income revenue enhancements ( Inland Revenue 1998 ) .

Different Torahs are imposed on the revenue enhancement aggregations. An appraisal is the procedure of determining and cognizing the revenue enhancement remunerators entire income that can be taxed and cipher the revenue enhancement that can be tax write-off from the employees entire income. There is a notice of appraisal, and it becomes concluding once the statutory period for reexamining it has expired. Self-assessment applies for income revenue enhancement to: –

Peoples who are self employed and are transporting on with their ain concern for illustration agriculture, trading etc.

Peoples who are having incomes from beginnings that can non be calculated by the PAYE system for illustration, house rents, foreign exchange income etc.

Under the self-assessment, there is peculiar day of the month for payment of revenue enhancement and besides for filing of the revenue enhancement returns. This system allows one to register his/her returns for the twelvemonth and besides the wage the outstanding balances.

Similarities of self-assessment and PAYE

They are both used in payment of the income revenue enhancement

They both have a specific deadline day of the months on which all the outstanding balances should be paid

Differences between self-assessment and PAYE

Where else PAYE as you earn system can be used for people who are employed, self-assessment is used by people who are freelance ( Dingeldey 2001 ) .

PAYE is tackled by the employer but the self-assessment is tackled by the individual paying the revenue enhancement

PAYE uses computerized system but the self -assessment does non utilize computing machine system.

The day of the month of revenue enhancement payment for PAYE is different from that of the self-assessment revenue enhancement payment.

Advantages of PAYE

Both the employer and the employee can acquire aid from the gross governments any clip they need it.

It is easy to cipher revenue enhancements because different methods are available for computations.

PAYE system is easy manageable unlike the other methods of revenue enhancement computations.

The information stored in this system is unafraid.

It is of high velocity, for illustration, to cipher revenue enhancement utilizing this system is really easy.

Usability- it is really easy to utilize this system, every bit long as one knows how to run a computing machine, he/she can be able to utilize the PAYE system ( Logue 2009 ) .

Disadvantages of PAYE system

It is expensive and hard to happen a individual to run the system ; the employers have to portion with some money to hold person to run the system.

The employers are the 1s who do the tax write-offs ; hence, the load of doing certain that the revenue enhancements were deducted is left on them.

Tax may be held falsely and payment be made subsequently.

When the income goes up, the system deducts more revenue enhancements, it does non look at the fact that, there possibly more tax write-offs that this individual may hold.

Incase the employee has left an employment ; the employer may take non to pay for the revenue enhancement that may hold accumulated.


PAYE system has made revenue enhancement payment in the United Kingdom easily. This is because, one time the system is installed, the employers are able to easy cipher the sum of money as revenue enhancement that the employees have made. The system is easy to utilize and the information stored in the system is unafraid. Dates have besides been set to do certain that, all revenue enhancements are paid at the right clip and by all employees. Rules have besides been set to do certain that no 1 forfeits the payment of revenue enhancement at all times. HRMC makes certain that all employers collect the revenue enhancements from their employees ‘ on their behalf ( HMRC 2005 ) .


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