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P.A.Y.E and NIC 2007-2008

Working for the taxman
If you are an employee working for someone else, your pay is usually simple – the money arrives each month with Pay-As-Earn tax (PAYE) and National Insurance Contributions (NIC) deducted.  You’d rather not pay them, but at least someone else has worked the numbers out.

When you start running your own business and employing other people, that “someone else” might have to be you.  You probably want to get on with your business idea and make money, but you have all sorts of legal responsibilities with complicated rules to catch you out and reams of paperwork to fill in.  If you set up a company for a business which you have previously run as a sole trade, you will become an employee of the company and you have to run PAYE for yourself, even if there aren’t any other workers.

Where do I start?
The first thing you have to do is notify your tax office that you have employees and you need to open a PAYE scheme.  They will send you a great deal of information for operating the system – some of it is “user-friendly”, such as a regular newsletter which publicises new rules and procedures, but quite a lot of it is hard to digest.

Running PAYE
The idea of PAYE is that the employer takes the right amount of tax and NIC off the employees’ pay before they ever see it, and hands it over to the taxman throughout the year.  If it works properly, the workers don’t have to fill in a tax return – they will have already paid exactly what’s due.  They avoid the forms, and the authorities don’t have to chase all those individuals.

So it’s up to the employer to get the tax calculations right.  You need a “notice of coding” for each employee, which you need to deduct the tax that the Revenue think is due.  Every time you make a payment to an employee – whether it’s every week or every month, or an annual bonus – you have to work out how much tax and NIC should be taken off.  You then have to pay all the deductions over to the tax collector each month – or once a quarter if your total deductions average no more than £1,500 a month.

There are many other rules to remember – for example, you are supposed to tell the tax office if you give a company car to an employee, or if you change an employee’s car.