2020/21 Tax Rates and Allowances
This page contains all of the personal income tax changes which were published on the gov.uk site on Fri 28 Feb 2020. These rates come into effect at the start of the new tax year, on April 6th 2020.
Updated for 2021/22 tax year
Whether you’re a sole trader or the director of a limited company, taking on your first employee is a big moment for your business. This straightforward guide will take you through the essentials of operating payroll and staff benefits in line with PAYE regulations.
Becoming an employer can seem like a daunting step in your self-employed journey. From finding the right person to work for you, to creating contracts, and making sure your payment process is in order, there is a lot to think about. It’s really important that you have a good understanding of your responsibilities as an employer, to ensure that your business is compliant with HMRC rules and regulations.
Registering as an employer is easy
Once you have hired an employee and agreed a contract with them, the next thing you need to do is register as an employer with HMRC, which can be done here. This will give you access to HMRC Online Services and give you your login details for PAYE Online.
HMRC Online Services will be your main tool for all communications with HMRC. You will need to use it to send mandatory payroll reports toHMRC, access tax codes for your employees, receive email reminders and alerts, and pay any penalties that you may receive. Whether you take on one staff member or ten, this is a system you will have to become familiar with!
You must register two days before your employee is due to be paid, but you can do this any time in the two months beforehand. It can take up to five days to receive your PAYE reference number, so it’s best to register early if you can.
You’ll also need to register your employee
Once you have agreed to hire someone, you need to alert HMRC and send them details about each new employee, in order to work out their tax code. If they have a recent P45, the information will be on there. If not, they’ll have to fill in a Starter Checklist for you to send to HMRC.
Once you have this information, you can enter it into your payroll system (more on this below) to correctly work out PAYE deductions.
Understanding PAYE as an employer
Paying your staff for their contracted hours isn’t the only payment you will have to manage as an employer - PAYE is a method of paying income tax and national insurance contributions.
You have a legal obligation to apply PAYE to the payments you make to your employees, if their earnings reach the National Insurance Lower Earnings Limit (LEL). For the tax year 2021-2022 the LEL is £120 a week, £520 a month or £6,240 a year.
Even if your employee doesn’t earn £120 per week, you will still need to maintain payroll records for them. In this case, you will generally only need to record and report their pay, unless they have another job or receive a pension.
PAYE Deductions
Through PAYE, you will make the following deductions from your employee’s pay:
- Income Tax
- National Insurance
The PAYE system is also used to deduct other payments from your employees, such as:
- student loan repayments
- employees’ pension contributions
- payments under an attachment of earnings order
- repayment of a loan you’ve made to an employee.
What is PAYE applied to?
PAYE is applied to any payment that an employee receives through working for you. According to smallbusiness.co.uk, this includes:
- salary and wages
- overtime, shift pay and tips – unless these are paid directly to your employee or they come out of an independent ‘tronc’
- bonuses and commission
- certain expenses allowances paid in cash
- statutory sick pay
- statutory maternity, paternity or adoption pay
- lump sum and compensation payments – like redundancy payments – unless they’re exempt from tax.
- non-cash items like vouchers, shares or premium bonds – you apply PAYE to the cash value of items like this
Understanding payroll as an employer
The second thing you must do when you employ someone, is set up a payroll system. This will be one of the most important tools in your role as an employer. Not only will you use it to pay your staff, but it is also used to calculate any PAYE deductions, generate payslips, make payments and submit information to HMRC in line with their rules and regulations.
Payroll Software
There are three options when it comes to handling payroll. You can:
- operate payroll yourself with special software,
- hire someone to do it for you in-house, or
- fully outsource your payroll to an accountant.
Whatever option you choose, the software must be approved by HMRC.
HMRC provides its own software. There is a free version for organisations with fewer than 10 employees but many other packages are available here. There are also software packages that you can pay for (which HMRC have listed here.)
Your monthly obligations
Your payroll system is the key to ensuring that you meet your obligations as an employer. Every time you pay your employees, there are certain things you have to do via your payroll software.
The month before you pay your employee
The government lists the following five key payroll obligations:
1. Make a record of your employees’ pay
You must make a record of how much every employee was paid each month, even if they get paid less than £120 per week. All taxable payments must be included, such as Statutory Sick Payetc. See Gov.uk for more on recording employees' pay.
2. Calculate deductions
Your payroll software will calculate out how much you need to pay by using your employee’s tax code and national insurance category letter. More at Gov.uk on deductions.
3. Calculate your employer’s National Insurance contribution
If your employee earns more than £183 per week, you will need to pay Employer’s Class 1 NICs. The rate that you will have to pay depends on their earnings and their National Insurance category letter.
4. Produce payslips
By law, each employee is entitled to a payslip for each payment they receive (Employment Rights Act 1999 section 8).
Your employee’s payslip must show all the deductions taken from their pay. These are:
- Income Tax
- Employee National Insurance Contributions
- Student loan deductions (if applicable)
- Pensions contributions (unless they have opted out or are ineligible).
It must also show:
- Gross pay
- Amount of deductions (tax, NI, pensions, student loan payments)
- Net pay
- Method of payment
Your payroll system will produce payslips for you. For more on payslips, see Gov.uk here.
5. Report thier pay and deductions to HMRC in a Full Payment Submission (FPS).
Whether or not your employee pays Income Tax, you will need to submit a payroll report to HMRC. This can be done by entering your PAYE Online login details into your payroll software. It’s important that you send your FPS on time, otherwise, you could be fined between £100 to £400 depending on how many staff members you employ. For more see Gov.uk here.
The tax month after paying staff
In the month following payment (beginning on the 6th) you can log into your HMRC Online account and you will be able to:
- View what you owe for the previous month.
- Reclaim reductions on statutory payments such as maternity and paternity leave.
- Make payments to HMRC.
Once you have paid your employees, you need to pay the deductions to HMRC by the 22nd of the following month if you pay online, or the 19th if you pay by post. If the average monthly payments are less than £1,500 each month, you can make quarterly payments.
Making payments to HMRC
When paying HMRC, you will need to know the PAYE Accounts Office Reference number that you received after you registered as an employer.
As well as paying the monthly deductions and National Insurance Contributions each month, there are annual payments to be made. At the end of the tax year, you will need to send HMRC a final Full Payment Submission (FPS) on or before your employees’ last payday of the tax year, on their P60.
It’s important to always pay on time, otherwise, you could have to pay interest or face a fine.
Other deductions that you may need to make
Student loan repayments
You will need to ask your employee if they have a student loan and record the answer in your payroll software. Luckily, you don’t have to calculate the deductions, as your software will do it for you! The amount that they need to repay is based on which plan they are on, which will be either:
- 9% of their income above £19,895 a year for Plan 1
- 9% of their income above £27,295 a year for Plan 2
- A new Plan 4 scheme is being introduced for all new and existing Scottish loans with a threshold of £25,000, so anyone with an existing Scottish loan will be moved from their existing Plan 1 to Plan 4.
- Postgraduate Masters or Doctorate loans -6% of their income above £21,000 a year in England; or 9% for Scottish and Northern Ireland students with income above £18,330.
*Rates as per tax year 2021/22
Pension Deductions
All employees now benefit from a pension plan. The new auto-enrolment pension rules mean that as an employer, you must enrol all employees aged between 22 and the state pension age who earn over £10,000 in a company pension scheme.
Each month, you will have to deduct pension contributions from your employees pay and make an employer contribution. You normally make pension deductions before you take off tax - check with your workplace pension provider.
The government recommend that you use The Pensions Regulator’s tool for employers to find out what you need to do and when you need to do it. You will need to do your research to decide on the best scheme for your business.
Child maintenance
You may need to deduct child maintenance directly from a paying parent’s earnings or pension. See Gov.uk for more.
Payroll Giving
You could give your employees the option to donate to charity directly from their pay before tax is deducted, by registering with Payroll Giving. Once you register, they will let you know how to make deductions.
Dealing with employee expenses
If your employee claims work-related expenses, you will have to record these on your payroll system and reimburse the employee through their pay. Business expenses are anything that your employee needs to do their job, are not typically treated as gross pay, and are not subject to tax and NI. For example, train travel to a meeting is a business expense.
If the expense is personal, then it will be considered gross pay and be taxable.
Managing employee benefits
Employee benefits are a brilliant way to promote employee satisfaction and wellbeing. Research carried out by Glassdoor found that 34% of employees say benefits and perks would attract them to a new job. There are many employee benefits to choose from, these can be free or paid for services. Free benefits include things like flexible working or skills training, these are very popular with employees.
How to manage benefits through payroll
Like expenses, different tax and NIC rules apply to employee benefits. HMRC maintains a list of the different types of benefits and expenses you can provide, and what sort of payments apply to them, here.
In some cases, PAYE is applied to the value of the benefit in the same way as it is applied to an employee’s salary or statutory payments e.g. maternity pay. However, in many cases you will need to report benefits to HMRC at the end of the tax year and make a one-off payment of Class 1A NICs on the value. Instead of using PAYE, a P11D form must be filled in and submitted every year detailing the relevant benefits. This usually alters the employee’s tax code for the following year.
Some of the benefits that you could consider are:
- Interest-free travel loans – you could provide employees with an interest-free loan of up to £10,000 in any tax year for the purchase of an annual travel card or season ticket. These are cheaper if bought annually rather than daily, weekly or monthly.
- Gym memberships – giving employees a free or discounted gym membership is a good way of maintaining employee health and wellbeing.
- Salary Sacrifice - Some benefits can be provided through salary sacrifice, which means the employee agrees to receive a lower salary in exchange for them (this makes the benefits cheaper as no income tax is paid on that money). These deductions will also have to be calculated through the payroll.
Other types of employee benefits include dental insurance, private medical costs, professional body membership fees and sick pay. There really is no limit to what you could offer, and there are plenty of employee benefit schemes that offer a range of packages and manage them for you.
Keep your records
HMRC require you to keep records of the following for three years:
- What you pay your employees and the deductions you make.
- Reports and payments you make to HMRC.
- Employee leave and sickness absences.
- Tax code notices.
- Taxable expenses or benefits.
- Payroll Giving Scheme documents, including the agency contract and employee authorisation forms.
You could be fined up to £3000 if you don’t maintain these records, so make sure you have a good system in place from the beginning.
Conclusion
This guide has given you a comprehensive and straightforward overview of what you need to know about operating a payroll system when you first become an employer. Although the move from sole-trader or director of a limited company can feel daunting, once the processes are up and running, it becomes much easier than you think.
Researching your payroll software to find the right option for you will ensure that you get the most suitable system for your business if you plan to run it in-house. Likewise, keeping accurate records of all payments going through your business is key in avoiding problems (and hefty fines).
Seeing your business grow and expand is exciting and getting these things right from the outset will save you time and stress in the long run.
Personal Tax
2019/2020 Tax Rates and Allowances
This page contains all of the personal income tax changes which were announced at the October 29th, 2018 Budget. These rates come into effect at the start of the new tax year, on April 6th 2019.
2018/2019 Tax Rates and Allowances
We have published a quick reference to the significant changes to the tax rates and bands, personal tax allowances and national insurance figures which come into effect from April 6th 2018.