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HMRC internal manual

Debt Management and Banking Manual

From
HM Revenue & Customs
Updated
, see all updates

Debt and return pursuit: PAYE: introduction to PAYE: employer and contractor responsibilities

Employers and contractors are responsible:

  • to HMRC for:

    • keeping appropriate records
    • operating the correct tax code number for employees
    • verifying the status of subcontractors
    • paying on time employee deductions of Tax, NIC and student loans as well as the employer’s contribution of NIC
    • paying on time subcontractor tax deductions
    • filing correct returns on time
    • applying CIS regulations (where appropriate).
  • to their employees for:

    • deducting the correct amount of Tax, NIC and student loan repayments
    • making statutory payments and tax repayments
    • providing a statement; for example, P60 to show amounts paid and deducted.
  • to their subcontractors for:

    • deducting the correct amount of tax
    • providing a statement to show amounts paid and deducted.

Record keeping

Employers and contractors have to keep records of all payments and benefits (including living accommodation) made to employees and subcontractors, along with details of Tax, NIC and any student loan deductions or statutory payments made, for three years from the end of the tax year. HMRC staff must be able to view such records when required.

Paying tax and NIC to HMRC

Employers and contractors are required to make monthly, quarterly or even annual payments to HMRC of employee and subcontractor deductions along with employer’s NIC. The payment frequency depends on the amount they have to pay and scheme type.

Employers can reduce their payment to HMRC by the amount of statutory payments they have paid to employees.

Returns

Prior to joining RTI, employers had to send an employer’s annual return to HMRC by 19 May following the end of the tax year detailing:

  • the payments they have made in the tax year (6 April to 5 April) to employees and directors
  • deductions from those payments.

The type of return an employer is required to send depends on the scheme and employer type.

Up to 2006-07, contractors were required to send a Contractor Annual Return (CIS36) to account for subcontractor payments and deductions. From 2007-08, contractors have to send monthly CIS returns instead.

Once an employer has joined RTI, they must file the returns mentioned below.

Employer Alignment Submission (EAS)

This is only completed by employers who have 250 or more employees and contains details of all employees on the employer’s payroll. On joining RTI, the employer submits the EAS, and HMRC compares payroll details held on NPS to check for any discrepancies. The employer is then instructed to operate PAYE under RTI. Once the employer has gone through the alignment process, no further EAS is required.

Full Payment Submission (FPS)

The employer must submit an FPS every time they make payments to employees (including those not liable to tax and NIC). For example, if the employer has both weekly and monthly paid employees then they must submit an FPS for every payday.

It contains the amount paid to each employee and any tax/NIC/student loan deductions. It must also include ‘year to date’ totals of payments made to individuals and ‘year to date’ totals of any deductions.

Employer Payment Summary (EPS)

The employer submits the EPS to advise HMRC that no payments have been made to employees in a tax month or when they wish to recover statutory payments, CIS deductions suffered or an amount under the NICs Holiday scheme.

A single EPS can be submitted to cover one or more tax months and does not include individual employee information. Therefore, it is not necessary to submit an EPS each time a statutory payment is made to an employee.

As with the FPS, the EPS must show ‘year to date’ totals.

Employee deductions

Tax

Tax is paid on all earnings above a limit set by Parliament. For most employees, their employer will ensure that tax is deducted from their salary and paid over to HMRC under the PAYE (Pay As You Earn) system. But some employees will deduct tax themselves, for example in Direct Payment schemes.

Most employees will have a tax code from Customer Operations and the employer will deduct tax in accordance with this code. If the employee has no code, the employer will use an emergency code and deduct tax accordingly. Tax deductions are set from tax tables which show the employer how much tax to deduct.

NIC Class 1

Class 1 NIC (National Insurance Contributions) is deducted from employee earnings up to a certain level. In addition, the employer also has to make a contribution towards employee class 1 NIC. This is the employer contribution and is paid to HMRC along with other deductions. Class 1 NIC counts towards employee state benefits, such as their state pension.

Student Loan deductions

Students taking out student loan(s) have to repay these once employed and when their salaries reach a certain amount. Employers will deduct a set percentage amount from their salary until this is repaid. HMRC will advise the employer when to start and finish making deductions.

Sub-contractor deductions

Contractors have to register with HMRC and provide details of all their sub-contractors. HMRC will advise the contractor how to pay their sub-contractor. This could be

  • gross - with no deductions taken off their payment
  • net of a deduction at the standard rate - 20 per cent
  • net of a deduction at the higher rate - 30 per cent

Contractors do not deduct NIC or Student Loan deductions from subcontractors.

Payments to employees

Statutory payments

In certain circumstances employees are entitled to receive statutory payments from their employer these are

  • SMP (Statutory Maternity Pay)
  • SSP (Statutory Sick Pay)
  • SAP (Statutory Adoption Pay)
  • SPP (Statutory Paternity Pay which includes ordinary and additional statutory paternity pay).

HMRC fund most of the statutory payment and employers can claim this by either deducting the amount from their PAYE payment or claiming an advance from HMRC. Further information is available on the HMRC website (Employers).

Tax refunds

An employee, whose circumstances change, for example moving from high paid employment to a lower paid one, may find that they are entitled to a tax refund. This refund will be made by the employer who can deduct the amount from their PAYE payment to HMRC. If this payment is not sufficient, the employer can claim an advance from HMRC to enable them to make the tax refund.

NIC

NIC Class 1

Class 1 National Insurance contributions are payable on salary or wages (between certain levels) and consists of

  • the employee’s contribution (deducted from pay), which is known as the primary contribution
  • the employer’s contribution, which is known as the secondary contribution.

Class 1 NIC counts towards employee state benefits such as state pension.

NIC Class 1A

Class 1A National Insurance contributions are payable on most benefits in kind (such as company cars made available for private use) and are paid by the employer not the employee. The employer calculates the contribution on an annual basis using the cash equivalent of the benefit. Class 1A NIC does not count towards any state benefits.

NIC Class 1B

Class 1B National Insurance Contributions are charged as part of a PAYE Settlement Agreement (PSA). A PSA is a voluntary agreement for the employer to pay tax and NIC on certain expenses and benefits in kind given to employees. Only employers pay Class 1B NIC, and the amount due is worked as a percentage of the PSA.