HMRC recently reviewed the ‘effectiveness’ of its risk-based approach to late filing PAYE penalties, and opted to continue to use this approach for the current tax year. Here we provide an overview of the PAYE system.
How the PAYE system works
Pay As You Earn (PAYE) is the system through which employers deduct an amount of income tax, national insurance contributions (NICs) and student loan repayments from employees’ wages, in accordance with the relevant PAYE codes and HMRC procedures.
Employers must normally operate PAYE as part of their payroll process. However, if none of the employees are paid £116 or more per week, receive expenses and benefits, have an additional job or receive a pension, employers do not have to register for PAYE, but they must still keep payroll records.
Real Time Information (RTI)
Since April 2014, employers have been required to report using the PAYE system in real time. As part of the RTI initiative, employers or their agents are required to make regular payroll submissions for each pay period during the year, outlining the payments and deductions made to and from employees each time they get paid. Employers are required to make two main returns: a Full Payment Submission (FPS), and an Employer Payment Summary (EPS).
The FPS must be sent to HMRC on or before the date employees get paid. Employers must include all employees, even if they earn less than £116 per week.
Some employers may be required to submit an EPS to cover certain situations, including:
- cases where no employees were paid in the tax month
- cases where an employer received advance funding to account for statutory payments
- situations where such statutory payments (such as Shared Parental Pay) are recoverable, alongside a National Insurance Compensation Payment
- instances where Construction Industry Scheme (CIS) deductions are suffered, which could be offset (note that this applies to companies only).
The amounts recoverable will be offset against the amount due from the FPS, in order to calculate the amount payable. An employer’s EPS must be with HMRC by the 19th of the month for it to be offset against the previous tax month’s payment.
At the end of the tax year, employers must make a final FPS or EPS return in order to inform HMRC that all payments and deductions have been reported.
PAYE and new employers
Employers must contact HMRC as soon as they take on employees, as a PAYE scheme must be set up for the business. Once registered, employers will receive guidance from HMRC, including a variety of forms together with online ‘basic PAYE tools’ to help calculate the amount of tax and NICs due.
Understanding the requirements is vital: HMRC carries out routine compliance checks, and can visit at any time. Employers will be held liable for any under-deductions found.
Penalties are issued where employers fail to meet their PAYE reporting requirements. You may be liable to a penalty if your FPS was late; if you failed to send the correct number of FPSs; or if you failed to send an EPS when you didn’t pay any employees in a tax month. Penalty fines issued by HMRC range from £100 for businesses with one to nine employees, to £400 for firms with 250 or more employees.
Successfully managing a PAYE scheme can be challenging and time-consuming. We can help. Please contact us for more information.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.