What is pay as you earn

Jason Smith

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Pay as you earn (PAYE) refers to a system of withholding of income tax from payments to employees. So in essence it is a method of paying income tax and national insurance contributions via an employee’s wages. Wages actually also includes sick pay, maternity or paternity pay and adoption pay.

PAYE was introduced into the UK in 1944 after it was devised by Sir Paul Chambers. As with many of the United Kingdom’s institutional arrangements, the way in which the state collects income tax through PAYE owes much of its form and structure to the peculiarities of the era in which it was devised. . PAYE is now required in the United Kingdom on all payments of salary or other compensation.

If you work for a company then your employer is responsible for sending the tax on to HM Revenue and Customs (HMRC). How it works is that employers deduct tax and national insurance contributions from an employees’ wage every pay period and pay Employer's Class 1 national insurance contributions if they earn above a certain threshold. Upon starting a job, employees should provide their employer a P45 form their last employer. If the form is not provided, the employee or employer must complete what’s called a P46 form. It is the employee's responsibility to inform HM Revenue and Customs of changes which will affect his or her allowances and reliefs and other income in the tax year.

To avoid a late-filing penalty on your PAYE, companies must ensure that the PAYE end-of-year reach HM Revenue & Customs (HMRC) by their allocated deadlines. HM Revenue & Customs won't necessarily send a reminder to file these forms so it’s your companies responsible to check this date. Almost all employers are now required to send their Employer Annual Return and in-year PAYE forms, including P45 and P46 to HM Revenue & Customs (HMRC) online.

If you don't send the correct amount, or if you send it in late, you may have to pay interest. Penalty charges for PAYE problems can be 5% of the amount owing and then you may have to pay a further 5% if you have not paid the full amount within a 5 month period of the penalty date within the UK. Following this there will be a further 5% charge if the penalty has still not been paid with 11 months of the penalty date.

This is when PAYE problems occur which businesses can get help with from professionally tax problem and PAYE problems consultants to help relieve any issues they may have. But problems with PAYE don’t just go one way, recently the UK HM Revenue and Customs made several mistake and had to pay out £400 to six million people after overcharged them. This mistake on their part meant that the HMRC have had to pay out an excess of over £2.5 billion in tax reconciliations dating back to 2001.

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