Payroll and benefits

If your business has employees, you’re legally obliged to meet your payroll tax obligations. You’ll want to ensure that payroll is painless and that you take advantage of any opportunities to improve your tax-efficiency.

We’ve included useful tools and calculators, but most employers find it easiest to get professional payroll help. Your accountant can advise you on what system would suit you best and the services on offer.

Payroll tax and PAYE

Payroll taxes are generally collected through the PAYE (Pay As You Earn) system operated by employers. If you have employees, you’ll almost certainly be required to operate PAYE unless all your employees have low earnings, aren’t given any additional benefits or don’t have income from another job or pension.

This applies even if you have set up a company with yourself as the only employee. You do not have to collect payroll taxes through PAYE if you are self-employed and have no employees.

Payroll taxes handled through PAYE include income tax and National Insurance contributions deducted from employees’ pay and the employers’ National Insurance paid by the business. The PAYE system involves calculating and paying any payroll taxes due to HM Revenue & Customs (HMRC), generally on a monthly basis.

Payroll tax and employee benefits

The PAYE system also covers the payroll taxes due on most employee benefits, such as expenses, health insurance and company cars. The main exception is any pension contributions the business makes into an approved pension scheme. There are no tax or National Insurance payroll taxes on the value of this benefit.

In most cases, the payroll tax for benefits is assessed and collected annually. The employer must also provide details to employees, who may need to declare benefits (and income) in their own self-assessment tax returns.

Operating the PAYE payroll tax system

Effective management of payroll taxes requires you to keep accurate records of employee details, pay and benefits. You need to calculate payroll tax deductions and make accurate, timely payments both to employees and to HMRC. You also need to deal with complications such as statutory sick pay and student loan repayments.

From this year, HMRC is reforming the Pay As You Earn system so employers will submit pay information every time an employee gets their wages, instead of reporting annually and using a P46 form.  

Due to be phased in by size of business, smaller businesses will need to have joined by 2014. The new system will be linked to employees’ benefit payments – to be known as Universal Credit payments - to improve the accuracy rate of tax payments and benefits.

Popular content on payroll and benefits:

• Pension income calculator
• Employer PAYE forms