Overview of PAYE

PAYE (“Pay As You Earn”) is the system that HMRC uses to collect Income Tax and National Insurance Contributions (NICs) from employees’ pay as it is earned. If an employee earns above a certain threshold, the charity as an employer must deduct income tax and NICs from the employee’s pay for each pay period and pay employer’s NICs. The charity must then pay over these sums to HMRC under Real Time Information (RTI).

A charity has a legal obligation to operate PAYE on the payments that it makes to an employee if his or her earnings reach the National Insurance Lower Earnings Limited (LEL). For the tax year 2016/17 this is £112 a week, £486 a month or £5,832 a year. However, you must keep payroll records for all employees.

The charity should use the employee’s tax code and National Insurance category letter to work out how much income tax and NICs to deduct from the employee’s pay and how much Employers Class 1 NICs the charity owes on the employee’s earnings. HMRC must have received payment by the 19th of each month (or the 22nd if payments are made electronically).

PAYE is applied to all payments that an employee receives as a result of working for the charity, including:

  • salary and wages
  • overtime and shift pay
  • tips – unless they are paid directly to the employee (where tax due is the employee’s responsibility) or they come from an independent tronc (an arrangement for the pooling and distribution to employees of tips, gratuities and/or service charges in the hotel and catering trade – in which case you must tell HMRC who the troncmaster is so that it can set up a PAYE scheme for the tronc.)
  • bonuses and commission
  • certain expenses, allowances paid in cash
  • statutory sick pay
  • statutory maternity/paternity or adoption pay
  • lump sum and compensation payments – such as redundancy unless they are exempt from tax, and
  • some items such as vouchers and premium bonds

As well as deducting income tax and NICs from the employees’ pay, for each period the charity might use the PAYE system to deduct:

  • student loan repayments
  • employees’ pension contributions
  • payments under an attachment of earnings order
  • repayment of a loan made by the charity to the employee, or
  • payments under Give as You Earn if the charity is operating such a scheme

The charity will need to provide the employee with a payslip at or before the date of payment. This can be in either paper or electronic format but it must show certain items, including:

  • the employee’s gross pay
  • all deductions and the purpose for which they are made, and
  • the net (“take-home”) pay

At the end of each tax year the charity must provide the employee with a summary of his or her income tax, NICs and other deductions on Form P60.

A charity has to pay over income tax and NICs each month. However, if the charity’s average monthly payments of income tax, the deductions from sub-contractors, student loan deductions and NICs for the current tax year are likely to average less than £1,500 a month, the charity can choose to pay quarterly rather than monthly. The tax quarters end on 5 July, 5 October, 5 January and 5 April, which means that cleared electronic payments are due on the 22nd of the month on which the quarter ends, or on the 19th if paying by cheque.

There is a special arrangement for faith-groups agreed by HMRC, under which a local religious centre (for example a parish church) can report payments made if it does not operate a PAYE scheme: see HMRC’s PAYE Manual PAYE 23030 – Employer records: employer types: local religious centres (LRCS).

From April 2013 HMRC introduced a new way of reporting PAYE: RTI means that employers are required to tell HMRC about PAYE payments at the time they are made as part of their payroll process. Payroll software collects the necessary information and sends it to HMRC online.

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