Payroll and PAYE Help

Employment Status

One of the first things to consider when engaging staff is whether an individual is an employee or self-employed. In any particular situation it is a question of fact depending on the terms under which he or she works. When you engage someone to do work for you, you have to decide whether or not to apply the PAYE rules. HM Revenue & Customs have issued guidance on this subject and now provide an online Employment Status Indicator (“ESI”). It is free and easy to use and can help you work out whether your workers are employed or self-employed in all but the most complex of cases. Provided that the information you input into the ESI is an accurate account of the work carried out for a particular engagement, you can rely on the ESI outcome as HMRC’s view of the status for that particular engagement, but you should retain:

  1. the printed version of the ESI result
  2. the printout of the Enquiry Details Screen showing the engagement details and the replies to the questions asked
  3. the engagement contract where applicable
  4. any other documentation or information you relied upon when completing the ESI.

HM Revenue have also published a guide “Employed or self-employed for tax and National Insurance contributions” which also provides a useful reference point, including a list of factors that will determine employment status.

Getting Started

Once you have decided that you need to operate a PAYE scheme, you should obtain and read carefully a copy of “Employer’s Further Guide to PAYE and NICs” which is published by HM Revenue & Customs. You will also need to register with HM Revenue. You can register up to four weeks in advance of your first pay day. Bear in mind that you might need to register as an employer even if you’re the only person working in your business. If you run a one-person limited company, you’ll be both an employer and an employee. You can register by calling the HM Revenue & Customs New Employers’ Helpline on 0845 60 70 143. The information you will need to provide will depend upon the type of business you are operating. For Limited Companies and Partnerships you will need to provide (items marked * are mandatory):

Information required from all employers

The following information will be required:

  1. name, business name, partner’s name, company name (as appropriate) *
  2. business or home address, including postcode (as appropriate)*
  3. business or home telephone number
  4. a contact email address *
  5. a contact telephone number *
  6. a name and address to send correspondence to
  7. the date of your first payday or, if earlier, the first date you made payments of expenses and/or provided benefits to your employees *

Additional information required in specific circumstances

If you are not a partnership or a limited company and you are not using simplified PAYE procedures for domestic employees, you will also need to provide:

  1. your unique taxpayer reference number
  2. your National Insurance number *
  3. trading name (if appropriate)
  4. the type of business you run *
  5. the number of employees you employ or expect to employ
  6. confirmation of whether you will be engaging any subcontractors in the construction industry
  7. confirmation of whether you will be acting as a Troncmaster (someone who divides up tips)
  8. confirmation of whether you are operating an Occupational Pension Scheme
  9. confirmation of whether you will be employing staff who are undertaking electoral duties
  10. confirmation of whether you will be employing staff to take on occasional educational examination duties

Additionally, if you are operating simplified PAYE procedures for domestic employees you should also provide details of:

  1. the nature of their employment with you *
  2. the name and address (including postcode) of each employee *
  3. their date of birth *
  4. their National Insurance number *
  5. confirmation of whether the employee has another job

If your business is structured as a partnership, you will need to provide:

  1. the partnership unique taxpayer reference
  2. the trading name (if appropriate)
  3. the nature of the business being registered *
  4. confirmation of your Limited Liability Partnership (LLP) number, where appropriate
  5. the number of employees you employ or expect to employ in this tax year
  6. confirmation of whether you will be engaging any subcontractors in the construction industry
  7. the name of each business partner *
  8. the National Insurance Number of each business partner *

And for Limited companies you should provide:

  1. the company unique taxpayer reference
  2. the trading name (if appropriate)
  3. the company registration number
  4. the address of its registered office
  5. the nature of the business being registered *
  6. confirmation of whether you are operating an Occupational Pension Scheme
  7. the number of employees you employ or expect to employ in this tax year (including paid directors)
  8. confirmation of whether you will be engaging any subcontractors in the construction industry
  9. the names of all company directors
  10. the National Insurance numbers of all company directors *

Employing your spouse or partner

When considering the overall tax position of your family, it is worth considering employing your spouse or partner in your business, if your spouse has unused personal allowances or pays tax at a lower rate than you do. But the spouse or partner in question must actually be doing something for the business, and be paid according to their role and hours. They should not be being paid simply as a means of generating costs within the business or using a spouse’s tax allowances.

In order to justify a salary, the following additional points should be borne in mind:

  1. the level of salary must be commercially justifiable
  2. the salary must actually be paid to your spouse
  3. the National Minimum Wage regulations are likely to apply

As well as a salary, you may be able to pay into a pension scheme for your spouse or partner. These should not be taxable on your spouse or partner and should save you tax as a business expense.

It may also be possible to provide your spouse with a ‘company car’, which should not give rise to any tax charge if the combined annual salary and notional benefit-in-kind is below £8,500, although again the need for commercial justification should be borne in mind.

As your spouse is an employee of your business you can also give them tax and NI-free childcare vouchers worth up to £55 per week for use with a registered or approved provider. These childcare vouchers should be made available to all your employees who have children aged under 16 to care for. It doesn’t matter how few hours the employee works; he or she will be eligible to receive the tax-free childcare vouchers, even if they are also receiving similar vouchers from another unconnected employer. Childcare vouchers do not count towards the National Minimum Wage. However relief is restricted to the basic rate of tax for new users from 1 April 2011.

Benefits in Kind & Expenses Payments

Benefits in kind are assessed on all directors and employees whose salary and benefits combined are £8,500 or more but they can be attractive to employees, especially if they are paying the higher rate of income tax, because the benefit may either be tax free or subject to less tax.

A benefit that is not taxable is not automatically exempt from national insurance contributions (NICs).

n employer is required to complete form P11D in respect of each employee earning £8,500 or more (including benefits) and all directors. Form P9D is required to record benefits received by other employees. These must be filed with HM Customs & Revenue by 6 July each year. Benefits for NIC purposes must be included on the deductions working sheet column 1A ‘earnings on which employee’s contributions payable’. (This should not include Class 1A NIC benefits on company cars and car fuel). Comprehensive records should be kept in relation to all benefits and expenses payments.

Non-Taxable Benefits

There are several benefits that are not normally taxable, even when an employee is within the P11D category. These can be significant. However Employer Class 1A National Insurance Contributions are payable on most benefits. The most significant non taxable benefits are:

  1. Contributions to registered pension schemes
  2. Car, motor cycle or bicycle parking facilities at or near the workplace
  3. Certain childcare provision
  4. Compensation/termination payments up to £30,000
  5. Luncheon vouchers up to 15p per day
  6. Staff canteen and dining facilities (provided they are available to all directors and employees)
  7. Removal expenses, subject to HM Revenue & Customs limits
  8. Long-service awards (provided they are an established practice within the firm or are in the employees’ contract) up to specified limits
  9. Awards under suggestion schemes (but there are restrictions)
  10. Use of a pooled car
  11. Use of a mobile telephone (not Smart phones)
  12. The provision of representative accommodation (except for certain directors)
  13. Approved profit sharing and share option schemes
  14. The provision of eye care tests and/or corrective glasses for using computer monitors
  15. Employer-provided cycles and cyclist’s safety equipment used mainly for journeys between home and work
  16. Certain bus services for journeys between home and work

Consideration should also be given to establishing a company pension scheme, which allows your employees to make additional provision for their retirement by paying regular amounts and additional voluntary contributions.

You may find the HM Revenue and Customs Helpsheet 207 “Non Taxable Payments or Benefits for Employees” helpful.

Taxable Benefits – Company Cars

The most common taxable benefit is probably the company car. If you make a car available to your employees and it is available for private use (including commuting), then this is a taxable benefit on the employee. Additionally, if you provide free or subsidised fuel for private use in that car, then this is also taxable. For the employer there is a Class 1A NIC liability.

The benefit charge is based on the car’s list price and its CO2 emissions and in general is lower for cleaner and cheaper cars. There is a 3% surcharge for diesel cars. This is to encourage employers and employees to choose cars which are less damaging to the environment. Emissions for a particular vehicle can be found at and you can then use HM Revenue’s Company Car and Fuel Benefit Calculator to determine the taxable benefit. You will also need to know the car’s list price (which includes VAT, road tax, and delivery). Essentially the car’s list price is multiplied by a factor which is determined by the CO2 emissions. For cars that produce no emissions the relevant factor is 0%, meaning that the car benefit charge for these vehicles is nil.

here the employer pays for any fuel used privately by the employee, there is an additional scale charge based on the CO2-based car benefit percentage applied to a standard value of £18,800.

Other Taxable Benefits

Expense payments will also need to be disclosed on year end forms P11D. However, the employees then need to make claims on their own tax returns for expenses incurred in the performance of their duties. In instances where an employee is not required to complete a tax return, form P87 should be used instead. Most employers can obtain a dispensation in respect of certain expenses payments, which could avoid the need to complete P11Ds in some cases and an application can be made at any time.