PAYE (Pay As You Earn) is the system that HM Revenue & Customs (HMRC) uses to collect Income Tax and National Insurance Contributions (NICs) from employees’ pay as they earn it.

As an employer, you will have to deduct tax and NICs from your employees’ pay each pay period and pay Employer’s Class 1 NICs if they earn above a certain threshold which is the National Insurance Lower Earnings Limit (LEL). For the tax year 2013-14 this is:

• £109 a week
• £473 a month
• £5,668 a year

You pay these amounts to HMRC monthly or quarterly. If you don’t send the correct amount, or if you send it in late, you may have to pay interest.

After the end of the tax year you must send HMRC an Employer Annual Return (form P35 and forms P14). Almost all employers are required to file this online.

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

• salary and wages,
• overtime, shift pay and tips,
• bonuses and commission,
• certain expenses allowances paid in cash,
• Statutory Sick Pay,
• Statutory Maternity, Paternity or Adoption Pay,
• lump sum and compensation payments – like redundancy payments –
• unless they’re exempt from tax,
• non-cash items like vouchers, shares or premium bonds – you apply PAYE
• to the cash value of items like this.

Real Time Information (RTI) is aimed at improving the operation of Pay As You Earn (PAYE). Currently, if you’re an employer operating PAYE you submit an end of year return to HM Revenue & Customs (HMRC). In future each time you run payroll you’ll submit details about employee pay and deductions to HMRC.

Most employers will start operating the new PAYE process from April 2013.

a. Update or acquire software or use a payroll provider:

When: You should do this as soon as possible or whenever your existing software provider tells you, but by 6 April 2013.

To be ready to report your payroll information each payday you must do one of the following:

• get payroll software if you don’t already have any (some packages are free)
• update your existing payroll software to a version with this functionality (your provider can advise on this)
• use a payroll provider (such as an accountant or payroll bureau) to do the reporting for you.

b. Ensure employee data is complete and correct:

When: You should start doing this now.
Before you change to PAYE in real time it’s essential that the data you hold in your payroll records is complete and accurate. You must check and, if necessary, update the data for all your employees or pensioners – certain details are essential, and must be in full and be correct or the payroll reports you send to HMRC will be rejected.

c. Change your procedures and inform your staff

When: You should start developing new procedures now. You may need to collect and record more information from your employees than you do today in order to report your payroll information to HMRC.

You may wish to let your staff know that you may need to check some information on your payroll records.

d. Register for PAYE Online

When: You should do this now.
If you are not already registered, and you are responsible for your own payroll reporting, then even though there are changes in how you report your payroll information to HMRC, you will still need to register for PAYE Online because:

• PAYE Online is how you may still send certain forms to HMRC
• if an employee tax code changes, PAYE Online is one of the ways HMRC will tell you
• to send your payroll reports to HMRC, your software will need your PAYE login details.

e. Include new information in your payroll records

When: Start doing this as soon as your software supports the additional information required.

When you report your payroll information in real time, you will need to send certain information that you may not currently keep on your payroll system. So you will need to inform your staff and change your processes to collect this new information – although you may not be able to include it in your payroll records until your payroll software is compatible.

f. Align HMRC’s data with yours

When: At or before the time you send your first report to HMRC.

To make your first PAYE real time payroll report successful, the data that HMRC holds on your employees must match your payroll data. When you change your payroll to PAYE in real time you will need to send HMRC information about every employee who has worked for you in the current tax year, even if they have already left your employment. So even if you don’t have to start reporting payroll information in real time until the 2013-14 tax year, it’s best to have new software and procedures in place before 6 April 2013, so that all the necessary information is already stored in your payroll system ready to be reported.

g. Start reporting your payroll information

When: HMRC is inviting a number of employers to participate in a pilot during 2012-13. And most employers will begin to operate their payroll in real time in April 2013, with all employers doing so by October 2013.
Once you’ve followed all the previous steps, you will be in a position to start reporting your payroll information on time.

h. Keep an eye on the HMRC PAYE news and updates page

When: Now and at regular intervals.

Any important news relating to PAYE and payroll operation is published on HMRC’s PAYE news and updates page. There are typically at least a couple of items published every month, so checking on it as part of your monthly routine is a good idea.

If you’re an employer, when you run payroll you submit your employee:

a) deductions, such as Income Tax and National, Insurance contributions
b) starter and leaver dates if applicable

You no longer submit an end of year return (forms P35 and P14) and the starter and leaver process is simplified: you continue to give your employee a P45 when they leave but you no longer send forms P45 or P46 to HMRC – instead you must submit all starter and leaver information as part of the Full Payment Submission (FPS).

When you run payroll your payroll software gathers the PAYE information you send to HMRC. To gather this information you can use commercial payroll software or HMRC’s Basic PAYE Tools. HMRC’s Basic Tools is only available to employers with up to nine employees.

You submit your PAYE information online to HMRC. If you use commercial software or HMRC’s Basic PAYE Tools you can do this via the Government Gateway, the online entry point to government services.

You can also use an Electronic Data Interchange (EDI) if you use commercial software. EDI is a dedicated connection or a secure network more suitable for large employers with employees running into the thousands. If you want to use EDI you also need to check if your payroll software supports it.

Almost all employers must report payroll information online to HM Revenue & Customs (HMRC) when or before any employee is paid.

In addition, you may have to report certain summary information about statutory payments recovered and other deductions each pay period, and if you don’t pay anyone in a pay period. You must also report end of year information at the end of the tax year, and certain information if your PAYE scheme closes.

You’ll have to report when you provide an employee with a car, or replace or withdraw one. You may also have to report expenses and benefits.

You submit a Full Payment Submission (FPS) each time you make a payment to an employee. The FPS includes:

Field name	What you must put in this field
National Insurance Number	The employee’s National Insurance number – if you know it. If you don’t know it, don’t put in a false or temporary number – instead, leave this field blank, but then you must complete the address field.
Title	The employee’s title: Mr, Mrs, Miss, Ms or other title.
Surname or Family Name	You must include the employee’s surname or family name.
Forename or Given Name	You must include the employee’s forename or given name.
Initials	If you don’t know your employee’s full forename(s), enter the initial(s) of the forename(s) in the initials field.
Second Forename or Given Name	You may include the employee’s second forename if they have one.
Date of Birth	You must include the employee’s correct date of birth.
Current Gender	You must state the employee’s current gender.
Address	You must provide the employee’s address for every new starter or where the employee’s National Insurance number is not known. Until the National Insurance number is known you must continue to provide the employee’s address on every subsequent FPS for that employment.
UK Postcode	The postcode if the employee lives in the UK.
Foreign Country	If your employee’s address is outside the UK, Channel Islands and Isle of Man then you must state  their country here and include their address in the address fields.

 

Payroll ID	You can include a Payroll ID to make it easier for you to identify the employee, and HMRC will then use this number in correspondence with you. If the employee has two or more employments under the same PAYE scheme, you must fill in this field and use a different Payroll ID for each employment under the scheme. Also, if you re-employ a former employee in the same tax year, you must specify a different Payroll ID to distinguish this employment from the previous one.
Payroll ID Changed Indicator	Use this field to report that the Payroll ID has changed. If the Payroll ID has changed since the last FPS tick the ‘Yes’ indicator and enter the old Payroll ID as well as the new one so that it’s clear that this is the same employment.
Old Payroll ID for This Employment	If the Payroll ID used in this FPS has changed since the last submission, you must put the previous one here.
Irregular Employment Pattern Indicator	‘Yes’ if the employee is not paid on a regular basis for example: casual or seasonal employees employees on maternity leave employees on long term sick leave any employee who for any reason will not be paid for a period of three months or more HMRC will check if an employee has not been paid for a certain period of time and will treat them as having left that employment. Setting this indicator on every FPS submitted for that employee avoids that happening.

Employer information you must include in every FPS and EPS (Employer Payment Submission).

Field name	What you must put in this field
HMRC Office Number	The HMRC office number. This is the first part of your Employer PAYE reference and is three digits. You will find this number on a P6/P9 notice of coding or your Annual/Budget letter
Employer PAYE Reference	Your Employer PAYE reference number. This is the second part after the slash.  You will find this number on a P6/P9 notice of coding or your Annual/Budget letter.
Accounts Office Reference Number	Your Accounts Office reference number – this can be found on your P30BC ‘Payment booklet’ or P30B ‘Paying electronically’. It will be in the format 123PA00012345 (this reference is only an example and should not be used to make a submission).
Related Tax Year	The Income Tax year that this report relates to.

 

From April 2013 – Employer information to be included in an FPS

Field name	What you must put in this field
SA UTR	Enter your Self Assessment reference (SA UTR) if applicable – for example, if you are an employer who is a sole proprietor or a partnership.
COTAX reference	Enter your Corporation Tax (COTAX) reference if applicable – for example, if you are a limited company.

 

Example:

Account Number	Serial Number	Company Name	Tax District	Tax Reference	Nr of Employees	Create Date	RTI Submission Date	Accounts Office Reference
60761557	L295863	Target Accounting	120	KA66221	4	19/07/2012	01/03/2013	120PM00479736

 

(!!!) Employer PAYE: 120/KA66221, divides into:

• Tax District : 120
• Tax Reference: KA66221

Other details you may need to submit

There are other submissions you may also make. These include:

• an Employer Alignment Submission (EAS) to align employee records with HMRC records before you submit other information. HMRC will send you an invitation to join RTI with a date you need to submit your employee
  details by. An EAS is required for :
  • large PAYE schemes with over 250 employees,
  • for a payroll administered by two or more payroll systems, including those operated by different payroll providers

• a National Insurance Number Verification Request (NVR) to verify or obtain a National Insurance number for new employees.
• an Employer Payment Summary (EPS) to report a reduction in the amount you pay to HMRC or if you haven’t paid any employees in a pay period.
• an Earlier Year Update (EYU) to correct after 19 April any of the year to date totals submitted in your final FPS for the previous tax year. This only applies to RTI years and the first year an employer can use an
  EYU is 2012/2013.

Getting your employee details ready By ensuring that employee details, such as full name, home address, date of birth, National Insurance number and gender are correct before the new PAYE process is introduced, you will:

• provide employees pay the correct Income Tax and NICs
• make it easier to match the information you send with HMRC’s record of your employee
• reduce the number of employee queries you receive from HMRC

The best way to check these details are correct is to verify them against a birth certificate, passport, driving licence or official document from HMRC or DWP (Department of Work and Pensions).