Taxes & Payroll
Even if you end up using an accountant to do the detailed work on your tax and payroll commitments, it's useful to know the basics so that you can understand what responsibilities you have to the taxman and your staff.
This section is designed to provide a few starting points to help you with paying taxes and wages. It does not provide a comprehensive statement of the law nor does it constitute legal or financial advice. You should always seek specialist legal or financial advice to suit your particular circumstances.
The finances of even a small company can be quite complicated, and these sections are just designed to give you a working knowledge of the fundamental issues. We've included some links in case you want more detailed information. One of the most useful sites is HM Revenue & Customs.
Getting help from HM Revenue & Customs Advice Teams
If you're thinking of setting up in business or have just started you could arrange to attend a free workshop with HM Revenue & Customs Advice Teams. They can give you practical advice on the tax matters that will affect you: record-keeping, filling in and filing your tax return - and what to do if you take someone on. These services are all free of charge and you can find out more, including how to make a booking, here.
Your responsibilities
There are five main tax areas which small businesses need to know about.
Corporation Tax
This is the tax on a limited company's income and profits. The amount due is calculated by either yourself or your accountant and declared to the Inland Revenue on a Company Tax Return Form. If you are not trading as a limited company, you do not normally have to pay corporation tax, but check to make certain.
Income Tax
If you choose to run your business as a sole trader rather than a limited company, you must register with the Inland Revenue as self employed. You will need to submit an annual self assessment form to the Inland Revenue and keep accurate and up-to-date records of all business transactions and accounts. You will also pay income tax on all profits and pay national insurance contributions on those profits.
PAYE
It is your responsibility as an employer to calculate and deduct income tax from employee's earnings.
National Insurance Contributions
You are also responsible for deducting your employees National Insurance Contributions.
Student Loans
In most cases if you have employees with outstanding student loans, you will collect the repayments on behalf of HMRC. You do this by making deductions from their pay. You can find the student loan deduction tables here.
VAT
VAT is a tax businesses are charged when they supply certain goods or services in the UK and Isle of Man. Whether you have to register for VAT depends on how much your taxable supplies are worth over the past twelve months - the current figure can be found on the HM Revenue & Customs website.
When do you become an employer?
When you give somebody work under a contract of employment, whether written or verbal, you are acting as an employer. In some cases, however the person working for you may be a self-employed contractor which affects the level of your responsibilities. You can find out how to tell the difference here
If you operate your business as a sole trader or partnership, you and your partners will be registered as self-employed and only become employers when you take on your first member of staff. However, if you set your business up as a company, the company becomes an employer when it begins trading, because directors are employees of the company.
You need to register as a new employer as soon as you know that you will be employing someone and you can do this by calling the HMRC helpline on 0845 607 0143.
You will need to provide details about your business such as the names and addresses of any partners or company directors, the nature of the business and its contact details. HM Revenue and Customs will also need to know who your employees are, when they were employed, and details relating to how you will operate your payroll system. See here for more guidance.
What are your statutory obligations?
As an employer you have obligations to your employees and to HM Revenue and Customs. The main ones are:
- Pay your employees at least the national minimum wage (NMW).
- Provide equal pay to both female and male employees' doing the same work.
- Deduct income tax and National Insurance Contributions from your employees' pay.
- Deduct student loan contributions from your employees pay when advised to do so.
- Allow your employees to take paid annual leave.
- Provide an itemised pay statement to your employees when they are paid.
- Pay your employees any statutory payments that they are due, for example SSP or redundancy.
Failure to comply with these requirements can result in financial penalties being imposed and legal action being taken against you.
Employee Tax Codes
Each employee is issued with a personal tax code by the Inland Revenue. You can calculate an employee's tax deductions by using this code together with the Inland Revenue taxable pay tables.
A new employees tax code can be found on their P45, however if they do not have this form they will need to complete a P46, details of which can be found on the Inland Revenue website.
PAYE forms
There are a number of standard forms and procedures which employers need in order to operate an effective system. These forms should be used to keep a record of all that has been paid to an employee including wages, payments and benefits.
There are three main forms which you need to give your employees to show how much income tax and NIC they have paid. These are:
- Wages Slips - created internally to show how their pay has been calculated.
- P45 - new employees who have had a previous job should give this to you when they start work. When they leave you give them a completed P45 .
- P60 - this shows the year's tax deductions and is given to employees at the end of the tax year.
If you need any help with PAYE, the Inland Revenue New Employers Helpline on 0845 60 70 143 will give advice or you could contact your local Business Link Support Team.
Hints and tips
- Make sure that you maintain accurate and up-to-date pay records and keep them for six years.
- Ensure that any deductions you make from your employee's pay are either legally required (PAYE & NI), are part of the employee's contract, or have been agreed in writing.
- Employees have the right to take you to an employment tribunal if you do not provide them with an itemised payslip.
- If employees wish to understand more about their entitlements to benefits, allowances and tax credits, the Department for Work and Pensions website (www.dwp.gov.uk) has helpful information.
Getting to grips with PAYE can be tricky - here are a couple of contacts that could be useful.
HM Revenue and Customs New Employer Helpline
0845 60 70 143
Payroll Guidance at HM Revenue & Customs website
The above information is correct at the time of writing (July 2009) but please check the details are up-to-date with the various organisations listed.
The contents of this guidance are for information only and no guarantee, representation or warranty of any kind is given (whether express or implied) in relation to any of the information, advice or opinions expressed in it. Whilst ICI Paints AkzoNobel have made all reasonable efforts to ensure that statements appearing in this guidance are accurate, ICI Paints AkzoNobel disclaims all liability and responsibility arising from any reliance placed on the information, advice and opinions contained in this guidance. ICI Paints AkzoNobel reserves the right to make any amendments or alterations to this guidance at any time, without notice.