Business Library
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Calculate employee wages and tax deductions |
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There are few more onerous tasks expected of a small business then the obligations which centre around employee wages and tax deductions.
The complexities begin the first time you decide to employ someone. As soon as you make this decision contact your local tax office, as the tax office that deals with your company may not be the one that deals with the tax of your employee. Employing people without registering them with the tax office and attempting to evade your wage or tax obligations is a serious offence.
As an employer you are responsible for deducting tax and class 1 National Insurance contributions from your employee under the Pay As You Earn system (PAYE). Then you will need to send the tax and National Insurance contributions (NIC) you have deducted to the Inland Revenue Accounts Office.
As an employer you will need during the tax year to:
- Deduct the correct amount of PAYE from your employees salary
- Work out how much NICs you and your employees have to pay
- Keep a record of your employees' pay, PAYE and NICs due
- Make monthly (or quarterly) payments of the total PAYE and NICs due to the Accounts Office
- If your employees are able to claim working families' tax credit, disabled tax credit and student loan deductions you have to pay these with your employees net pay. Tax credits are not subject to deductions of PAYE or NICs. This has to be shown on your employee's pay slip
- Send a Return to the Tax Office showing details of each employee's total pay and the PAYE and NICs due
- Pay this over to the Inland Revenue Accounts Office each month. This can be done quarterly if your average monthly payments of tax and NIC are below 600
- Inform your tax office at the end of each tax year how much your employee has earned and how much tax and NIC you have deducted, you must also provide full details of any benefits paid such as private health insurance etc.
- You must provide your employee who has paid PAYE or NICs and is still working with you at the end of the tax year with statements showing their earnings, tax and NIC deductions made and any benefits provided
Obviously this can all take a lot of time, one solution would be to use a payroll agency which will complete a lot of the paperwork and day to day administration for you. Otherwise software companies such as Sage and Intuit have a range of payroll and accounting packages which save a lot of time and can also handle other aspects of business accounting.
Action Checklist:
- Contact your local tax office to get the necessary documentation and leaflets explaining PAYE and NIC
- Before taking on an employee consider all the work processing their pay and benefits will involve
- Remember to keep all appropriate documentation in good order to make the accounting easier
- If you are going to hire an agency or an accountant to manage your employees pay, make sure your choose one that is used to operating in your line of business.
Many small businesses outsource their payroll service to a professional agency.
This is a guide. It may be helpful for you to speak to an advisor in employee wages. E&OE