Posted by Joy & Co Chartered Certified Accountants on 10th June 2020
This question comes up often, especially for businesses with part time employees who are on low wages. If you employ staff you need to accurately record how much you pay them and, where necessary, calculate and deduct tax and national insurance before paying them. This tax and national insurance is called PAYE (Pay As You Earn) and you pay it over to HMRC. There are some instances where a PAYE scheme is needed and some where one isn’t. So how will you know if you need to set up a PAYE scheme for your business?
The short answer is - it depends.
The longer answer is as follows:
If you are a sole trader or in a partnership and you don’t employ any other staff then you don’t need to set up a PAYE scheme. Any money that you and/or your partner take from the business is known as drawings and simply needs to be accurately recorded.
A second instance where there is no need to set up a payroll scheme is if you employ somebody and pay them less than the lower earnings limit, currently £120 per week. Beware however, that if the employee has another job or a pension, or gets expenses and benefits then you will have to set up a scheme.
If you own a limited company and all it’s employees, including yourself, are paid less than £120 per week then you don’t have to set up a PAYE scheme. For example, if you have three employees and pay them all £119 per week then no PAYE scheme is needed. If, however one of the employees is paid £121 a week, i.e. above the lower earnings limit, then you need to set up a scheme and put ALL your employees on it - even if they don’t have any tax or national insurance to pay.
If you employ somebody and pay them more than £120 per week and/or you give them a benefit such as a company car then you do need to set up a PAYE scheme.
Remember that even if you don’t have to set up a PAYE scheme you should still make sure that all wages paid are accurately recorded. Wages are an allowable expense when calculating your taxable profit, so make sure you record it or else you could be missing out on a huge chunk of tax relief that is due. You may think that such a thing is obvious and doesn’t need to be said but consider the following situation.
Joe Bloggs runs a business and desperately needs a bookkeeper but he doesn’t want to employ one as he doesn’t want the hassle of setting up a payroll scheme. Meanwhile he’s forgotten that his wife used to work as a bookkeeper before she became a stay at home mum. He could pay his wife £120 a week to keep his books in order. By doing this he’d be giving his wife over £6,000 of tax free income per annum and he’d be able to claim over £1,200 in tax relief for her wages.
If you need help setting up a PAYE scheme for your business or even just help in deciding whether or not you need one we’ll be happy to advise. We can even run the scheme for you dealing with HMRC on your behalf. Get in touch today, we’ll be happy to help.
