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Pay As You Earn

Updating author: Vince Ashall

Summary

  • Employers are required to deduct income tax and national insurance contributions (NICs) where they operate a PAYE scheme for one or more employees. (See The PAYE system)
  • Employers must send the income tax and NICs that they collect, along with employer NICs, to HM Revenue and Customs, within certain time limits. (See Payment of tax and national insurance)
  • Employers may be able to claim the employment allowance to offset against their Class 1 NICs. (See Employment allowance)
  • Some employers must pay the apprenticeship levy via the PAYE system. (See Apprenticeship levy)
  • Leavers should be provided with a P45 showing their total tax and pay figures to date. (See Leavers and new employees)
  • All employees in employment on 5 April should be given a form P60 at the end of the tax year. (See The end of the tax year)
  • Real time information is the normal method of reporting deductions and requires employers to report deductions prior to, or at the time of, paying staff. (See Real time information)
  • Employees may be entitled to child tax credit or working tax credit paid direct to claimants by HM Revenue and Customs. (See Tax credits)
  • Employees can make donations before taxable pay is calculated to their nominated charities through the Payroll Giving Scheme. (See Payroll giving)

Future developments

Tax thresholds: For 2020/21, the income tax personal allowance of £12,500 and higher rate threshold of £50,000 (which apply for 2019/20) are not due to change (Budget 2018).

Employment allowance: Also in the Budget 2018 on 29 October 2018, the Government announced that, from April 2020, entitlement to the employment allowance (see Employment allowance) will be restricted to employers with employer national insurance contributions below £100,000 in their previous tax year. On 25 June 2019, the Government published a consultation on draft Regulations (and related documents) to effect this restriction from 6 April 2020. Also from this date, employment allowance will be administered as de minimis state aid. As a consequence, employers will have to provide HM Revenue and Customs with more information than at present to claim the allowance, to comply with state aid monitoring requirements. Employers will also have to claim the allowance annually (rather than having to claim only once, as at present).

The consultation closes on 20 August 2019.

State pension age: There is legislation already in place to raise the state pension age to 67 between 2026 and 2028 and to 68 by 2046. However, the Government intends to escalate the increase to 68. See Pensions > State pension > Future developments for further details concerning potential changes to state pension arrangements.

Termination payments: From 6 April 2020, employer national insurance contributions will be due on termination payments of more than £30,000 that are already subject to income tax. See Pay and benefits > Basic pay and benefits > Future developments for more details.

Off-payroll working in the private sector: The Government intends to extend the reforms to the intermediaries legislation (also known as IR35 - see Intermediaries legislation (IR35)) applicable in the public sector from 6 April 2017, to the private sector. With the Budget 2018 on 29 October 2018, the Government published its response to its Off-payroll working in the private sector consultation. On 11 July 2019, the Government published its response to a further consultation: Off-payroll working rules from April 2020, as well as an updated policy paper on Rules for off-payroll working from April 2020. With the policy paper it published draft legislation to be included in the 2019-20 Finance Bill, to effect the extension of the reforms to medium and large organisations outside the public sector.

Under the proposed rules, in relation to contracts entered into, or payments made, on or after 6 April 2020, the organisation, agency or other third party receiving the off-payroll workers' services (the client) will be responsible for operating IR35, rather than the individual being engaged.

Corporate clients that fit the definition in s.382 of the Companies Act 2006 of a small company (namely a company that satisfies two of more of the following requirements in a year: turnover of not more than £10.2 million; a balance sheet total of not more than £5.1 million; and no more than 50 employees) will be exempt from the new requirements. Non-corporate clients will be exempt if their turnover in a financial year does not exceed £10.2 million.

A client will be required to pass a "status determination statement" to the party it contracts with and to the worker. This must state if the client has concluded that the worker would, or would not, be regarded as an employee of the client for tax purposes if the worker's services were provided under a contract directly between the client and the worker (ie whether or not the conditions for IR35 to apply have been met) and its reasons for that conclusion. The status determination statement will be passed down the supply chain to the "fee-payer" (the entity in the chain immediately above the worker). There will be a process for addressing disagreements about status.

The Government is consulting on the 2019-20 Finance Bill provisions. This consultation closes on 5 September 2019.

The PAYE system

The PAYE system requires employers to collect tax and national insurance from employees as authorised by the Income Tax (Earnings and Pensions) Act 2003 and the Social Security Contributions and Benefits Act 1992. Employers are also required to collect student loan deductions (see Pay and benefits > Deductions from wages and attachment of earnings > Student loans) and, from 6 April 2017, pay the apprenticeship levy where due (see Apprenticeship levy). Official guidance about the PAYE system is available, such as CWG2: Further guide to PAYE and national insurance contributions. There are also deductions working sheets, including form P11, which enable employers to record the amount of income tax due from each employee in each pay period. However, most employers use a computerised payroll system to perform tax and national insurance contributions (NICs) calculations. Consequently, the intricacies of the system are not detailed here.

The personal allowance for 2019/20 is £12,500 and the income tax bands for the tax year 2019/20 are as follows:

Rate of tax Taxable income
20% basic rate 0-£37,500
40% higher rate £37,501-£150,000
45% additional rate Over £150,000

The higher rate threshold for 2019/20 is £50,000.

Different rates apply in Scotland - see Pay and benefits > Key differences in Scotland and Northern Ireland > Scotland > PAYE tax.

Under provisions in the Wales Act 2014, the setting of income tax levels is partially devolved to the Welsh Assembly from April 2019. While the personal allowance and income thresholds continue to be set by the UK Government, the Welsh Assembly determines Welsh rates of income tax for taxpayers living in Wales. The UK Government will reduce by 10p the rates that apply for the rest of the UK and the Welsh Government will legislate for additional rates to the reduced UK rates. The National Assembly for Wales has approved the Welsh rates of income tax for 2019/20, confirming that the Welsh rates are set at 10p. This means that Welsh rates are the same as the rates for the rest of the UK for 2019/20.

Welsh taxpayers are identified by the prefix "C", similar to the "S" prefix for Scottish taxpayers.

See Tax codes to use from 6 April 2019.

There is a transferable element of 10% of the personal allowance in respect of married couples and those in a civil partnership (the marriage allowance). The tax code suffixes are M for the recipient and N for the transferor.

The Government has published form P9X(2019), detailing the tax codes that employers should use from 6 April 2019.

NICs are payable by employers in respect of all employees aged 21 and over (except apprentices aged under 25 (see below)) and by all employees aged 16 and over but under state pension age.

For employees aged between 16 and 20, employer NICs are payable only on earnings above the upper secondary threshold (£962 per week for 2019/120). This threshold applies only to employees aged under 21 (and is set at the same level as the upper earnings limit although this may not necessarily be the case in future). Four new national insurance letters (M, Z, Y and P) were created as a result of the exemption for those under 21. See Abolition of employer national insurance contributions for under 21s: employer guide for further information on the national insurance letters and the exemption.

There is an exemption from employer NICs in respect of apprentices aged under 25. The exemption extends only to earnings up to the apprentice upper secondary threshold, which is set at the same level as the upper earnings limit (£962 per week for 2019/20) (although this may not be the case for future years). Two new national insurance letters apply: H (standard rate) and G (apprentice mariners). For apprentices under 21, the apprentice national insurance letter takes precedence over the under 21 national insurance letter. According to government guidance, Paying employer national insurance contributions for apprentices under 25, apprentices must be "following an approved UK government statutory apprenticeship framework" for the exemption to apply.

The national insurance earnings thresholds and rates for 2019/20 are as follows:

Earnings threshold (per week) Employee primary Class 1 rate Employer secondary Class 1 rate
Up to £166 0% 0%
£166.01-£962 12% 13.8%
Over £962 2% 13.8%

With the introduction of the single-tier state pension from 6 April 2016 (see Pensions > State pension > Single-tier pension, contracting-out has been abolished. Employees on one of the contracted-out national insurance letters in 2015/16 had to be transferred to the equivalent not contracted-out letter (for example from D to A) from 2016/17.

The state pension age is 65 for men and women. The state pension age for women was previously 60. It was harmonised over a period up to 6 November 2018 with that for men (Pensions Act 1995 and Pensions Act 2011).

By October 2020, the state pension age for men and women will have risen from 65 to 66 in accordance with the timetable below:

Date of birth Pension age
6 December 1953 to 5 January 1954 6 March 2019
6 January 1954 to 5 February 1954 6 May 2019
6 February 1954 to 5 March 1954 6 July 2019
6 March 1954 to 5 April 1954 6 September 2019
6 April 1954 to 5 May 1954 6 November 2019
6 May 1954 to 5 June 1954 6 January 2020
6 June 1954 to 5 July 1954 6 March 2020
6 July 1954 to 5 August 1954 6 May 2020
6 August 1954 to 5 September 1954 6 July 2020
6 September 1954 to 5 October 1954 6 September 2020
6 October 1954 to 5 April 1960 66th birthday

Employment allowance

The National Insurance Contributions Act 2014 introduced the employment allowance with effect from 6 April 2014. Businesses and charities can claim the employment allowance, which entitles them to up to £3,000 per annum off their liability for employer's secondary Class 1 national insurance contributions (NICs) for a tax year. Employers can claim the allowance through standard payroll processes and real time information. The allowance is subject to a number of exceptions and there are arrangements to prevent connected employers from claiming the allowance more than once. The Government has published guidance on the employment allowance.

From 6 April 2016, companies where the director is the sole employee are unable to claim the employment allowance. Further, HM Revenue and Customs has clarified that limited companies where the director is the only employee paid at a level above the secondary threshold for Class 1 NICs, will be unable to claim the employment allowance (see Single-director companies and Employment Allowance: further guidance).

Prior to 6 April 2016, the employment allowance was up to £2,000 per annum.

Apprenticeship levy

Part 6 of the Finance Act 2016 introduced the apprenticeship levy, with effect from 6 April 2017. The apprenticeship levy is paid via the PAYE system. The levy is 0.5% of an employer's pay bill, although employers receive an allowance of £15,000 to offset against payments. This means that the levy is paid only by employers with a pay bill greater than £3 million. The "pay bill" is earnings on which Class 1 secondary national insurance contributions are payable (including earnings below the secondary threshold and the earnings of apprentices under 25 and employees under 21). The levy is payable on a monthly basis. The Income Tax (Pay As You Earn) (Amendment) Regulations 2017 (SI 2017/414) provide for payment, collection and recovery of the levy. Further guidance is in Apprenticeship funding: how it works.

The Government has published Apprenticeship funding in England, which sets out how it funds apprenticeships in England. Separate arrangements apply in Scotland, Wales and Northern Ireland. See also the Government's Apprenticeship technical funding guide and Apprenticeship funding rules 2018 to 2019, which apply to apprenticeships starting on or after 1 August 2018.

Additional resources on the apprenticeship levy

FAQs

"How to" guidance

Audio and video

Survey analysis

Payment of tax and national insurance

Employers have to pay all tax and national insurance deductions made in a tax month (ie the sixth of one month to the fifth of the next) from their employees, as well as their own share of national insurance contributions (NICs), to HM Revenue and Customs (HMRC). Employers are also required to collect student loan deductions (see Pay and benefits > Deductions from wages and attachment of earnings > Student loans) and, from 6 April 2017, pay the apprenticeship levy where due (see Apprenticeship levy). Payment of tax and NICs must be made within 14 days of the end of the tax month for employers using non-electronic payment methods, eg cheques. Cheque payments can be made in person at banks. Alternatively, cheques can be posted direct to HMRC Banking Operations (the Accounts Office). Cheques are cleared within set time limits under new rules that the banks have agreed with the Office of Fair Trading, the rules being incorporated into the Banking Code in March 2008.

A small employer may pay its tax/NIC remittance quarterly instead of monthly if it thinks that its average monthly tax, national insurance and student loan payments will be less than £1,500 (the employer need have only reasonable grounds to believe that this will be the case) (reg.70 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) and para.11 of sch.4 to the Social Security (Contributions) Regulations 2001 (SI 2001/1004)). The employer should complete declaration form P31 and send this to Banking Operations (the Accounts Office).

However, there is a mandatory requirement for "large employers" to pay electronically, the due date being within 17 days of the end of every income tax month, ie the 22nd of the month. Where the 22nd is a non-bank working day, the Debt Management and Banking unit (formerly the Collector of Taxes) must receive payment by the last bank working day before the 22nd. A large employer is one with 250 or more payees (employees and/or pensioners) in its PAYE scheme. During 2019/20, occasions when the 22nd is not a bank working day are as follows:

Tax month Period Payable by
02 6.5.19-5.6.19 21.6.19
05 6.8.19-5.9.19 20.9.19
08 6.11.19-5.12.19 20.12.19
10 6.1.20-5.2.20 21.2.20
11 6.2.20-5.3.20 20.3.20

Equally, allowance needs to be made for up to two extra days for receipt by HMRC when the 22nd falls on a Monday, Tuesday or (after a bank holiday) Wednesday. If the payment is to be made under the "faster payments" system (see below), payments can be forward-dated for Saturdays and Sundays (and most bank holidays) and will be received by HMRC on the day of payment even though it is not a banking day.

Other employers may voluntarily take advantage of the deferred payments deadline by paying their PAYE remittances electronically.

The approved methods of electronic communications for the making of payments are "faster payments" using internet and telephone banking, BACS direct credit, debit or credit card (but not personal credit card) over the internet (BillPay), online direct debit, Paymaster (for government departments and local health authorities) and CHAPS. Employers can also use the banks and building societies giro service. For further information see Pay employers' PAYE.

Where payment is made by cheque, the cheque merely has to be received on or before the 19th of the month even though it may not be cleared until later. However, in the case of electronic payments, cleared funds must be received by HMRC within the specified extended time limit.

Customers using internet or telephone banking are able to make same-day transfers between bank accounts under a system known as "faster payments". The system is managed jointly by VOCA, which also handles electronic BACS transfers, and LINK (the ATM network), and there is a transaction limit of £100,000. Individual banks may, however, choose to set lower limits. From 16 December 2011, HMRC is able to receive "faster payments". However, this will not help employers that need to make payments that exceed either their own bank's individual transaction limit or their bank's overall daily limit for all faster payments.

Payments made by BACS, direct debit, telephone/internet banking and CHAPS must be sent as follows:

Accounts office Account name Sort code Account number
Cumbernauld HMRC Cumbernauld 08-32-10 12001039

If payments are being made from an overseas bank account, they should be made to the following HMRC bank accounts:

Account name Bank identifier (BIC) Account number (IBAN)
HMRC Cumbernauld BARCGB22 GB62BARC20114770297690
HMRC Shipley BARCGB22 GB03BARC20114783977692

Employers paying by post or at banks are issued with payslip booklets with the required payee details, which differ from the above. These payments are dealt with by NatWest and Alliance and Leicester.

Penalties are applied to all employers, regardless of size, that are late making in-year (ie monthly or quarterly) PAYE/NICs and Construction Industry Scheme remittances. The amount of the penalty will depend on the number of defaults in any 12-month period or the number of defaults in relation to a tax year). There is no penalty for the first default. Other defaults attract a penalty starting at 1% and rising to 4% of the tax/NIC unpaid. There are further penalties of 5% of any amounts still unpaid at six and 12 months after the end of the year, but these penalties will not be charged during an agreed time to pay arrangement (unless the taxpayer defaults or misuses the arrangement). This penalty regime replaced the previous scheme, which applied only to large employers required to pay on time and by electronic means.

Interest is automatically charged by HMRC on unpaid or late remittances received after the 19 April (22 April for electronic payments) following the end of the tax year. The Finance Act 2009 harmonised interest rates across all HMRC imposts. See HMRC late payment and repayment interest rates for the current rates.

Employers may deduct from the remittance sent to Banking Operations (the Accounts Office) any statutory maternity, paternity and adoption pay that they are entitled to recover in that same tax month.

If an employee is entitled to a refund of tax, for example because he or she has been absent from work for a period in which he or she was not earning wages, his or her employer may provide the refund in full through its PAYE system, provided that the employee is not on strike.

Employers are required to keep records of the PAYE and national insurance they have paid for three years after the end of the relevant tax year, unless these records have already been sent to Banking Operations (the Accounts Office), eg until 5 April 2022 for records relating to the tax year 2018/19. This three-year rule applies to both paper and electronic records. However, HMRC may seek arrears for up to six years in the case of any alleged errors. Therefore it is usually beneficial to keep records for the longer six-year period wherever possible.

In addition to the monthly (or in some cases, quarterly) remittances of PAYE and Class 1 NICs, employers that provide taxable benefits in kind will have a Class 1A national insurance liability. This is an employer-only charge equal to the employer rate (ie 13.8% for 2019/20). Unlike the situation with PAYE and Class 1 NICs, there is no mandatory requirement for "large employers" to pay electronically, but if they or other employers do so the due date is 22 July after the end of the tax year. If 22 July is not a bank working day, HMRC will need to receive electronic payments of Class 1A national insurance by the nearest preceding bank working day, unless the "faster payments" system is used. The due date for receipt of cheque and other non-electronic payments is 19 July.

The in-year late payment penalty regime referred to above in respect of PAYE/NIC also applies to Class 1A NICs, in that the 5% surcharges for six and 12 months' delay also apply to these liabilities.

HMRC can require a financial security in respect of PAYE and NICs (including Class 1A), in the case of employers that have a history of serious non-compliance in terms of not making their monthly remittances either on time or at all (s.85 of the Finance Act 2011, the Social Security (Contributions) (Amendment No.3) Regulations 2012 (SI 2012/821) and the Income Tax (Pay As You Earn) (Amendment) Regulations 2012 (SI 2012/822)). This is akin to the similar power that HMRC has in relation to VAT.

Leavers and new employees

Most employers are not required to file PAYE in-year forms (P45 (Part 1) and P46). Instead, employers and pension schemes (other than those covered by the exceptions below) are required under real time information (RTI) provisions to report all starter and leaver information via payroll software on their full payment submission (FPS) each time they pay an employee (see Real time information). The information previously provided via the P46 is collected using the new starter checklist.

The limited exceptions to compulsory online filing using an FPS are as follows:

  • Practising members of religious societies or orders whose beliefs are incompatible with the use of electronic methods of communication. In the case of, for example, a company, every director would need to meet this requirement.
  • Care employers, ie employers with employee(s) who provide domestic or personal care or support services at or from the employer's home and where:
    • the service is provided to the employer or a family member;
    • the recipient of the care has a physical or mental disability or is elderly (ie 65 or over) or infirm; and
    • the employer files its return itself.

Payroll software will gather the PAYE information to send to HM Revenue and Customs (HMRC), based on the payroll entries made. Employers can use any RTI-enabled commercial payroll software or HMRC's basic PAYE tool package, which is designed for employers with nine employees or fewer. Submission of the information using the relevant payroll software is done online via the Government Gateway. It is not possible to use HMRC's PAYE online returns and forms direct from the HMRC website to send this PAYE information.

Automatic in-year late filing penalties apply (see below).

An employer should, in most cases, provide Parts 1A, 2 and 3 of a P45 to employees leaving their employment. However, where HMRC has issued a tax code, the P45 procedures apply and a P45 must be given to an employee when he or she leaves the employment.

The employee should retain Part 1A for self-assessment purposes. A second P45 should not be issued, even where a further payment is made to a leaver.

HMRC introduced an updated form P45 (all parts) on 27 October 2008 to incorporate the individual's date of birth and gender. Employers can now print, via a non-impact printer, Parts 1A, 2 and 3 on plain white A4 paper. Completion of the date of birth and gender fields is mandatory.

When an individual (irrespective of his or her age) starts to receive a pension, the employer or pension payer must send this information to HMRC on the FPS.

If an employee starts a new job he or she should provide Parts 2 and 3 of his or her P45 to the new employer. This form may show the employee's cumulative pay and tax to date (figures relating to a previous tax year are ignored as tax is by its nature accumulative across a tax year). If the employee does not provide a P45, the employer is no longer required, with limited exceptions, to issue a form P46. Instead, it must use a "starter checklist" to ask the employee a series of questions similar to those on form P46, which will allow the employer to establish the correct tax code to apply, and make student loan deductions if appropriate. This may enable it to allocate an emergency tax code to the employee based on the information provided by the employee on the form.

Where the employee supplies a P45 from his or her previous employer, the new employer should use the tax code and previous pay and tax details from the P45 to calculate the tax to deduct. However, only the code from the P45 and the answers to the new starter questions should be included on the FPS.

From 6 April 2018, all payments in lieu of notice (PILONs) are subject to tax and Class 1 (employee and employer) national insurance contributions (NICs). Prior to this date, the tax and NIC treatment of PILONs depended on the terms of the contract. See Pay and benefits > Basic pay and benefits > Termination payments for more details.

Redundancy payments from a statutory or non-statutory HMRC approved scheme are liable to PAYE tax only where the total taxable payments on termination exceed £30,000, and are not liable to national insurance.

Ex gratia payments are normally made on an employee's leaving employment, but are not necessarily made as compensation for loss of employment. The term "ex gratia" is often misused, but can best be described as a payment that there is no legal obligation to give or receive. The tax and national insurance contributions liability, if any, can really be determined only by assessing what the payment is designed to reflect. If it is made as a result of an acknowledged practice to make such payments to employees who leave it will be subject to tax and national insurance contributions in full.

Additional resources on leavers and new employees

FAQs

The end of the tax year

At the end of the tax year (5 April), an employer must give to all employees in employment on that date a P60, which shows among other detail:

  • the employee's name;
  • the employee's permanent national insurance number, or if this is unknown the employee's date of birth and gender;
  • the employer's name and address;
  • the dates of the tax year;
  • the employer's PAYE reference;
  • pay and tax details from previous employment(s) in the same tax year and the current employment, and totals for the whole year;
  • the tax code and basis in use for the employee on 5 April;
  • the employee's own and the total national insurance contributions (NICs) paid; and
  • statutory payments made (with the exception of statutory sick pay).

Form P60 must be provided to relevant employees. Pay and tax certificates can be issued electronically (reg.211 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) and para.9(2) of sch.4 to the Social Security Contributions Regulations 2001 (SI 2001/1004), both as amended). The employer can elect to show the employee's business address on form P60 in order to aid the internal distribution of P60s.

When a regular pay day falls on a non-banking day (Saturday, Sunday or bank holiday), and payment is made on the last working day before the regular pay date, the payment may be treated for PAYE and national insurance purposes as having been made on the regular payment day. For example, in 2018, Good Friday fell on 30 March, and employee payments due on this date but paid on the previous Thursday 29 March can be treated for PAYE and national insurance purposes as being paid on 30 March 2018.

Real time information

Real time information (RTI) involves employers reporting deductions to HM Revenue and Customs (HMRC) prior to, or at the time of, paying staff rather than once a year. The traditional processes for starters and leavers and at the year end have been enhanced and largely superseded by RTI. Employers using RTI no longer need to submit forms P14 and P35 as HMRC will have accumulated the equivalent information from the separate reports that employers have made during the year on the occasion of each payment. Nor is it necessary for an employer to send forms P45 or P46 to HMRC when employees join or leave its employment.

Automatic in-year late filing penalties apply. A penalty will arise, for example, in respect of a tax month where an RTI return is late during that tax month (other than with respect to the first tax month in a tax year in which a filing default occurs). However, employers will be liable to only one penalty in respect of each tax month. The rules apply separately in respect of each PAYE scheme operated. Further penalties may arise for "extended failures" where an RTI return is outstanding for three months or more. These penalties are not automatic, but if applied will be calculated at 5% of the amount that would have been shown as due on any missing return(s). The Government has published guidance for employers - see What happens if you don't report payroll information on time.

Interest applies to in-year payments not made by the due date.

Certain specialist types of PAYE scheme are outside the scope of RTI (see archived government guidance on PAYE Real Time Information - employers who operate specific PAYE schemes and Find out which employers are exempt from online payroll reporting for further details). There are other limited exemptions from the requirement to file electronically.

In some cases, where reporting information in real time would be difficult or impossible, employers, subject to certain conditions, have up to seven days to report PAYE. This applies where payments are made:

  • on the day of work and vary according to the work done and where it is impractical to report in real time; and
  • to employees for whom the employer does not have to maintain a deductions working sheet (form P11).

Further, there is extra time to report payments of benefits and expenses subject to Class 1 national insurance contributions but not taxed under PAYE. Employers are able to report these payments the next time that they run the regular payroll, or 14 days after the end of the tax month in which they made the payment, whichever is earlier. Employers are also able to delay reporting notional payments. (See Real Time Information: timing of real time PAYE returns for more information.)

More information on RTI can be found on the GOV.UK website.

Payroll giving

If an employee wishes to make charitable donations to any registered UK charity he or she may do so through the Payroll Giving Scheme before the deduction of tax from his or her earnings (but not before Class 1 national insurance). As of 6 April 2000, tax relief is available on all contributions made via PAYE by employees at their marginal rate of tax (20%, 40% or 45% as the case may be). The charity and the agency to which the employee donates money must be approved for this purpose as regulated by ss.713-715 of the Income Tax (Earnings and Pensions) Act 2003. See Payroll giving for further information about the scheme.

Additional resources on payroll giving

Policies and documents

Intermediaries legislation (IR35)

PAYE applies to employees. However, PAYE may apply also to individuals who might not be considered to be employees.

The intermediaries legislation (also known as "IR35") may come into play where an individual supplies his or her services to a client via an intermediary (known as "off-payroll working"). The intermediary may be:

  • the individual's own limited company;
  • a service or personal service company;
  • a partnership; or
  • an individual.

Determining whether IR35 applies can be difficult. Although the contract between the intermediary and the client may imply self-employment, the individual's employment status should be considered as if the intermediary were not involved. This test needs to be undertaken for each contract. See Contracts of employment > Determining employment status for details of the factors determining employment status. The client organisation should consider the employment status of the individual to ensure that it meets its own PAYE duties.

If the individual:

  • works for the client as a self-employed contractor, sole trader, freelancer, or consultant;
  • could be regarded as an employee if the intermediary did not exist; and
  • pays him- or herself through his or her own limited company or partnership (ie an intermediary or personal service company) or he or she has a material interest in that company,

the IR35 rules apply.

If IR35 applies, the intermediary must operate PAYE and make deductions for income tax and national insurance contributions on the salary and wages that it pays to the individual during the tax year.

In certain circumstances, for example where:

  • the contract or working arrangement shows that the individual is engaged directly by the client as an office-holder or employee; or
  • the client contracts directly with the individual, even where payment is made to the intermediary,

the client organisation is responsible for operating PAYE for the individual.

Penalties may apply if the individual, intermediary or client organisation fails to comply with IR35 requirements.

See IR35: working through an intermediary for more details.

Managed service companies

The managed service companies legislation applies instead of IR35 where service to a client is provided through an intermediary company that is controlled and run by a third-party service provider.

The intermediary company must operate PAYE and national insurance contributions (NICs), including secondary Class 1 NICs, on deemed employment payments.

See Managed service companies for more details.

Intermediaries legislation (IR35) and the public sector

Provisions in the Finance Act 2017 changed the way that IR35 is applied to off-payroll working in the public sector in relation to payments made to intermediaries by public-sector organisations on or after 6 April 2017.

Where:

  • a worker personally provides services for a public authority via an intermediary (usually a personal service company); and either
  • the worker would be regarded as an employee of the public authority for income tax purposes if the contract for services had been with the worker and not the worker's intermediary, or
  • the worker is an office holder of the public authority,

the public authority is responsible for determining if IR35 applies to the worker.

If IR35 does apply, the public authority must deduct income tax and national insurance contributions (NICs) in respect of the payments that it makes to the intermediary and make contributions to HM Revenue and Customs (HMRC). If the intermediary is paid by an agency or other third party that contracts with the public authority to supply the worker's services, and the IR35 rules do apply, it is the responsibility of the agency or third party to account for the associated income tax and NICs.

Managed service companies may come within scope of these provisions if the conditions set out above are satisfied.

The rules do not apply:

  • to fully contracted-out services delivered in the public sector; or
  • where an agency directly employs a worker and operates PAYE and NICs on earnings it pays to the worker.

The rules apply to public authorities as defined by the Freedom of Information Act 2000 and Freedom of Information (Scotland) Act 2002.

When deciding whether or not the IR35 rules apply to an engagement, the public authority must look at the arrangements under which the worker provides his or her services to it and apply the normal tests to determine what the worker's employment status would be if the contract had been directly between the worker and the public authority. HMRC has introduced an online tool to help employers check the employment status of off-payroll workers and decide whether or not IR35 applies. HMRC will stand by the result given by the checking service, unless it finds that the information provided by the employer was not accurate.

Public authorities have a duty to provide information to the intermediary, or to an agency or other third party that is paying the intermediary, confirming its conclusion on whether or not the worker would have been an employee had he or she been employed directly. This information must be provided before the date of the contract, or before the provision of the service begins, if later. The public authority must respond within 31 days to written questions from the intermediary, agency or third party on its reasons for reaching that conclusion. If the public authority fails to confirm its conclusion on the worker's status or to respond to written questions within the required timescales, or if it fails to take reasonable care in reaching its conclusion, the public authority becomes liable to account for the income tax and NICs.

If a person working through an intermediary provides fraudulent information to the public authority, agency or third party, with the intention of persuading it that IR35 does not apply, the person providing the fraudulent information will be liable for the tax and NICs.

If the public authority determines that the worker would have been its employee, but for the existence of the intermediary, the public authority (or the agency or other third party paying the intermediary) must pay tax, NICs and the apprenticeship levy (if applicable) on the deemed employment payment made to the intermediary, using the normal real time information procedure. To calculate the deemed employment payment, the public authority should deduct:

  • VAT;
  • an amount representing the direct cost of materials used, or to be used, in performance of the services; and
  • (this step is optional) an amount representing expenses that would have been deductible if the worker had been the client's employee and the expenses had been met by the worker out of those earnings.

The Government's technical note confirms that the rules do not create any new pension obligations on the public authority, agency or third party.

See the Government's Off-payroll working in the public sector: changes to the intermediaries legislation - policy paper, Off-payroll working in the public sector - guidance and Off-payroll working in the public sector: reform of the intermediaries legislation - technical note for more details.

Tax credits

Child tax credit

Child tax credit is available to families with at least one child and is payable direct to the claimant, not via the employer's payroll. It consists of:

  • a family element that is payable in respect of children born prior to 6 April 2017, to families responsible for a child;
  • a child element that is payable for each child for whom an employee is responsible (although not payable in respect of third and subsequent children born on or after 6 April 2017), and is paid at a higher rate if the child has a disability and at an enhanced rate if the child has a severe disability (the disabled child element).

For 2019/20, the child element of child tax credit is £2,780 per year. The family element (normal and baby addition) is £545 per year.

Universal credit is replacing child tax credit (see Universal credit).

Working tax credit

The working tax credit is a top-up on earnings of low-income working families, to ensure that work pays more than welfare. It is payable to individuals and couples, provided that the required number of hours are worked. It is paid direct to the claimant, not via the employer's payroll.

For 2019/20, the threshold for the working tax credit is set at £6,420. The maximum eligible childcare costs for the working tax credit are £175 for one child and £300 for two or more children, per week and the percentage of costs covered is 70% for 2019/20.

See Working tax credit for more information.

Universal credit is replacing working tax credit (see Universal credit).

Detrimental treatment and working tax credit

Under s.47D of the Employment Rights Act 1996, employees have the right not to be subjected to a detriment by their employer for exercising (or proposing to exercise) the right to apply for the working tax credit.

Salary sacrifice and tax credits

An employee must consider whether, in receiving childcare vouchers as part of a salary sacrifice arrangement instead of claiming tax credits towards childcare costs, he or she will be financially better off.

From 6 April 2011 onwards, the childcare element of working tax credit is up to 70% of qualifying childcare costs. As a result, more families may benefit from help through tax credits than through employer-provided benefits such as childcare vouchers. Employees can claim help through the childcare element of working tax credit only for the childcare costs that they actually pay. If an employer meets an employee's childcare costs, even if his or her pay has reduced in return (a salary sacrifice) these costs do not count.

The Government has set up an online calculator to assist employees in determining whether they would be better off financially receiving tax credits or opting for childcare vouchers from their employer to help with childcare costs.

From 4 October 2018, and following the introduction of the Tax-free Childcare scheme (see Pay and benefits > Basic pay and benefits > Tax-free Childcare scheme), childcare voucher schemes are closed to new entrants and no new schemes can be set up. See Pay and benefits > Basic pay and benefits > Employer-supported childcare agreements entered into prior to 4 October 2018 for details of the provisions that apply in relation to agreements made with employees prior to 4 October 2018 for employer-supported childcare.

Additional resources on salary sacrifice and tax credits

"How to" guidance

Child benefit for high earners

Under s.8 of the Finance Act 2012, those with an adjusted net income of over £50,000 in a tax year face a tax charge designed to cancel out the value of the child benefit that they receive. The charge is graduated so that it amounts to 1% of the amount of child benefit received for every £100 of income between £50,000 and £60,000. As a result, there is a 100% withdrawal at the income level of £60,000. The charge is collected through self assessment tax returns. See Child Benefit income tax charge for more details.

Key references

Legislation

The Finance Acts
Social Security Contributions and Benefits Act 1992
Income Tax (Earnings and Pensions) Act 2003
Commissioners for Revenue and Customs Act 2005
National Insurance Contributions Act 2011
National Insurance Contributions Act 2014
Social Security (Contributions) Regulations 2001 (SI 2001/1004)
Income Tax (Pay As You Earn) Regulations 2003 SI 2003/2682

Guidance

Payroll publications for employers
CWG2: Further guide to PAYE and national insurance contributions

Documents

PAYE: starter checklist
P11
P45
P60