PAYE system

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • PAYE system
  • PAYE income
  • Real Time Information (RTI)
  • Tax codes
  • Checking PAYE coding notices
  • Underpayments of tax
  • K Codes

‘Pay As You Earn’, or PAYE, is the system by which HMRC collects income tax and National Insurance from employees. Employers must act as collectors of tax for HMRC and if they fail to operate PAYE correctly they will be liable for penalties.

The PAYE system is also used to collect student loan repayments from certain employees by HMRC, which in turn passes these onto the Student Loans Company.

The PAYE regulations contain detailed provisions with regard to the collection and recovery of tax and NIC, the retention and production of records, interest and penalties for compliance failures and PAYE appeal procedures.

ITEPA 2003, s 684; SI 2003/2682

PAYE must be applied at the 'time of payment'. For guidance on when remuneration is taken as paid, see Salary v dividend

PAYE income

ITEPA 2003 defines 'PAYE income' in section 683 as consisting of:

ITEPA 2003, s 683
  • PAYE employment income
  • PAYE pension income (eg payments by employers to former employees under pension schemes), and
  • PAYE social security income (eg Statutory sick pay and Statutory maternity pay paid by employers to relevant employees)

PAYE employment income consists of:

  • any taxable earnings from an employment in the year, and
  • any taxable specific income from an employment in the year

This definition therefore covers most cash payments made by employers to employees including salaries, bonuses and termination payments.

There are some cash payments made by an employer to an employee that will not be subject to PAYE. The main example is the payment of excluded business expenses. These are expenses which would not give rise to a

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