PAYE

1
PAYE
Theory and Practice of Taxation C Year
2006-07 Lec 9

• AN INTRODUCTION

1
2
PAYE

• Pay As You Earn is a method of collecting Income
  Tax (and National Insurance contributions) from
  employees
• It is operated by employers who act as (unpaid)
  Tax collectors for Inland Revenue
• It is the employers duty to deduct Income Tax
  from his employees emoluments (of all kinds) and
  hand this over to the Inland Revenue

2
3
PAYE

• Deduction of tax at sourceIntroduced by
  Addington in 1803. First applied to income from
  employment in 1944 when the number of people
  paying income tax trebled.
• Tax not deducted at a flat rate like other types
  of income (eg 20 from bank interest), but at an
  amount which will settle all the tax payers
  income tax liability thereby making it
  unnecessary for the taxpayer to fill in forms of
  self assessment at he end of the year

3
4
PAYE

• Principle of PAYE Malcolm
  
  
  
  Tax dedSalary
  20,000
  ?Bank interest
  4,000
  800STI
  24,000
  Less Personal allowance
  5,035
  Taxable income
  18,965 IT
  2,150 _at_ 10 215.00
  16,815 _at_ 22
  3,699.30
  18,965 3,914.30
  
  Less tax deducted 800.00
  
  Tax payable 3,114.30

4
5
PAYE

• Principle of PAYE
  
  
  
  Tax dedSalary
  20,000
  3,114.30Bank interest
  4,000
  800.00STI
  24,000
  Less Personal allowance
  5,035
  Taxable income
  18,965 3,914.30
  IT 2,150 _at_ 10 215.00
  16,815
  _at_ 22 3,699.30
  18,965
  3,914.30
  Less tax deducted
  3,914.30
  Tax payable
  0
  PAYE deduction has taken into account
  Personal allowance and different rates of tax. It
  will take into account many other personal
  circumstances eg tax underpaid in previous periods

5
6
PAYE HOW IT WORKS

• Code numbers
• Inland Revenue gives a Code Number to each
  employee
• This number is notified simultaneously to the
  employee and the employer by a Notice of Coding
• It is based on the employees entitlement to
  Personal Income Tax allowances (Personal
  Allowance, etc)
• It may be adjusted to take account of e.g
  benefits in kind, unpaid tax etc

6
7
PAYE

• Code numbers cont
• Example An employee is aged under 65 is
  entitlement to the Personal Allowance is 5,035
  and pays a professional subscription of 180
• The code number will be 5035180 5215/10521
• It is the basis on which the employees weekly or
  monthly tax deduction is calculated. Tax tables
  will instruct the employer how much tax to deduct
  for someone with a tax code of 521

7
8
PAYE

• Code numbers contSuffixes are also used egL
  indicates entitled to basic personal
  allowanceBR tax should be deducted at basic
  rate from all income. Employee in previous
  example would have a tax code of 521L This
  makes it easier to give effect to tax changes (eg
  an increase in the Personal Allowance) without
  changing tax codes for everyone

8
9
PAYE

• To operate the system the employer needs
• Deduction working sheets
• The employees code numbers
• Tax tables

9
10
PAYEDeduction Working Sheet (P11)

• Pay in Total pay Total free Total taxable
  Total tax Tax dedctdweek to date pay
  to pay to date due to or
  refundor mth date
  date in the
  wk
  
  or mth
• 1 2 3 4
  5 6 71
  1,000 1,000 400
  600 113 1132 1,000
  2,000 800 1,200
  226 113

10
11
PAYE Calculation of tax deducted

• Column 1 is the period
• Column 2 pay for the current period
• Employees gross pay is added to the total of all
  previous amounts of gross pay from 6 April to
  date column3
• Using the code number from Table A the
  proportionate amount of the employees allowances
  for the year to date is ascertained (tax free
  pay) column 4
• Taxable pay to date is total pay (col 3) less
  total free pay (col 4) entered in col 5
• Tax due to date is found from the taxable pay
  tables (B to D) column6
• Total tax already paid (col 6 at the end of
  previous month) is deducted from total due to
  date tax to be deducted from employees pay
  this period enter in col 7
• NI table are used to work out the contributions
  due

11
12
PAYEDeduction Working Sheet (P11)

• Malcolm from earlier eg at end of year
• Pay in Total pay Total free Total taxable
  Total tax Tax dedctdweek to date pay
  to pay to date due to or
  refundor mth date
  date in the
  wk
  
  or mth
• 1 2 3 4
  5 6 71
  1,000 1,000 400
  600 113 1132 1,000
  2,000 800 1,200
  226 11311
  18,000
  3,004
  
  12 2,000
  20,000 5,035 14,965
  3,114 110

12
13
PAYE - Employers responsibilities
1. Following the end of the Tax Year

• Provide each employee with a form P60 showing
• Taxable emoluments for the year and tax deducted
• Code number NI number employers name/address
• Send Inland Revenue
• By 19 May
• Form P14 end of year return (same details as P60)
• Form P35 (summary of IT and NI deducted)
• By 6 July
• Forms P11D (Benefits in kind for 8,500
  employees)
• Forms P11D(b) (Class 1ANICs)
• Forms P9D (Benefits to other employees)

13
14
PAYE - Employers responsibilities 2
When an employee leaves

• Provide the employee with a form P45 showing
• Taxable emoluments for the year and tax deducted
• Code number NI number employers name/address
• all to date of departure.
• The form is in 4 parts
• 3 parts go the employee
• Part 4 is sent to Inland Revenue
• If an employee joins with a P45 the new employer
  can operate PAYE
• If a new employee does not have a P45, they must
  complete a form P46, giving their details, and
  send it to Inland Revenue

14
15
PAYE 8

• PAYE settlement agreements
• Arrangements whereby employers can make single
  payments to settle their employees income tax
  liabilities on expense payments and certain
  benefits in kind
• Benefits may be included if the Inspector
  considers them to be minor, irregular ,etc
• Items covered by a PSA need not be included in
  P11Ds, P9Ds or the employees tax return
• Cannot be used to settle the tax on cash payments
  of wages, etc, major benefits, round sum
  allowances
• Tax is due by 19 October following.

15