Employers and especially new employers who may not be
experienced with operating a payroll system enter a
business area with tax rules and procedures with which they
may not be familiar. The most common questions asked by
employers who are operating or about to operate a PAYE
scheme are here
What is an income tax code?
An income tax code is a reference number which may also
include letters or be entirely letters which determines the
amount of gross pay which is free of income tax deductions
and may also determine the way in which income tax should
be deducted. If the tax code contains a number this number
represents the amount of tax free income an employee can
earn in a financial year, for example 522L means an
employee has a tax free personal allowance of 5,225 pounds.
A tax code of BR means all the employee gross pay should be
taxed within the PAYE scheme at the basic rate of income
tax.
What does week 1 of month 1basis mean?
Week 1 and Month 1 basis is an instruction to the employer
operating a PAYE scheme to not calculate the income tax on
a cumulative basis which is the normal basis but instead
the employer has to calculate the income tax to be deducted
on a non cumulative basis. A non cumulative basis is the
total gross pay for that week or month excluding any
previous pay in earlier pay periods regardless of whether
that previous gross pay was paid by the current or a
previous employer.
Because the income tax is deducted on the gross pay in a
specific pay period an employee on a week 1 or month 1
basis does not receive an income tax refund in respect of
previous tax deductions. Normally an employee is placed on
a week 1 or month 1 basis when the tax deductions history
for the current financial year are incomplete and the week
1 month 1 basis is removed when the missing history is
determined
Do I deduct income tax and national insurance if a new
starter says they are self employed?
The decision as to whether a worker is an employee or self
employed rests with the employer responsible for the PAYE
administration. If that worker is determined to be an
employee then income tax and national insurance deductions
must be deducted from payments made to that employee.
If the employer decides that the worker is self employed
then no income tax or national insurance deductions should
be made from the payments. But it is not as simple as that
and any employer who has doubts should clarify the position
with the local Inland Revenue helpline. A wrong decision by
the employer could be very costly and strict rules are
enforced.
There are numerous conditions which are applied to
determine if a worker is an employee or self employed and
several years after that worker joined the business the
potential tax liabilities can come back to haunt the
employer. The tax authority can invoke a number of
conditions any one of which if proved can result in the tax
authority deciding the status of a worker is that of
employee and not self employed.
When the status of a worker is determined by the tax
authority to be employee and not self employed the employer
will incur a liability for income tax and national
insurance that should have been deducted from the employee
and also a liability for employers national insurance
contributions. The liability being increased as the Inland
Revenue will determine that the amount paid to the employee
was a net wages payment after deductions and the perceived
gross pay thereby enhanced.
As the income tax and national insurance contributions may
not be practically recoverable from the employee and the
calculation would be applied retrospectively to previous
years employment the cost to an employer can be
considerable.
When should national insurance contributions be deducted
from an employee?
National insurance must be deducted from all employees who
are over the age of 16 and under the state retirement
pension age of 60 for a woman and 65 for a man. Equality of
employment does not apply to government legislation on
equality of employment between men and women where national
insurance contributions and pension payments are concerned.
In addition national insurance should only be deducted from
an employee wage or salary if that income is at or above
the national insurance earnings threshold. The earning
threshold usually changes each year and should be checked
in case of doubt with the current tax thresholds applicable.
What do I do if my new employee does not give me a P45?
If the new employee either does not possess or has lost the
P45 from a previous employee then the employer operating
the PAYE scheme must still deduct tax and national
insurance from any wages payments made to that employee and
also advice the Inland Revenue to establish the tax status
of the employee. If the employee does not have a P45 the
employer must complete a P46 and send the P46 to the Inland
Revenue without delay. Following receipt of the P46 the
Inland Revenue will notify the employer of the income tax
deductions to be made.
In the period from when the employee commences employment
and notification of the employee tax status is received the
employer should adopt a week 1 or month 1 status for that
employee and also use an emergency tax code. The emergency
tax code would be the standard personal allowance for that
tax year.
Is a medical certificate required before statutory sick pay
payments are made?
It is advisable for an employer to obtain from an employee
written documentation of sickness. This documentation can
be in the form of self certification which should be filed
as part of the PAYE administration. If an employee
satisfies all the conditions to receive statutory sick pay
and there is no reason for the employer to doubt the claim
then strictly speaking statutory sick pay can be paid
without medical evidence.
How as an employer do I fund working tax credits?
Working tax credits an employer may pay to an employee is
deducted from the PAYE and other deductions that employer
has made and is payable to the Inland Revenue. Eligible
deductions include deductions from employees in respect of
income tax, national insurance, student loans and CIS
deductions and employer national insurance contributions.
If the deductions are insufficient to cover the tot6al
working tax credit to be paid to an employee the employer
can apply to the Inland Revenue who will fund the shortfall.
Why the employer is charged penalty fines when the
accountant submits the tax returns?
Penalty fines are chargeable to the employer responsible
for submission of the annual PAYE tax returns. The
responsibility for submitting the tax returns on time to
avoid penalties may be delegated by the employer to the
accountant. That is regarded as an internal arrangement
between the parties which is not recognised by the income
tax regulations with the employer always retaining the
ultimate responsibility for submitting tax returns on time.
----------------------------------------------------
Terry Cartwright, CEO at DIY Accounting, designs Accounting
Software for small to medium sized businesses
http://www.diyaccounting.co.uk and Paye Payroll Software
packages for up to 20 employees at
http://www.diyaccounting.co.uk/payroll.htm
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