Federal Income Tax Table

Pay As You Earn Wages And Salaries Tax Scheme Explained

Executive Summary About Pay As You Earn Wages And Salaries Tax Scheme Explained By Terry Cartwright

PAYE is the common abbreviation for the Pay As You Earn scheme that was first introduced by the UK in 1944 as a tax system by the inland revenue which employers administer to deduct from employees wages and salaries income tax and national insurance contributions and account for the employers national insurance contributions. Every employer in the UK must register as an employer with the tax authority. The paye system is a scheme whereby employees are deducted income tax and national insurance on a weekly or monthly basis according to the frequency of wage and salary payments by the employer who then pays the income tax and national insurance contributions over to the inland revenue in the UK each month.

The employer is also responsible for keeping a record of the employers national insurance contributions which together with the employee deductions are paid over to the tax authority on or before the 19th of the month following the pay period. PAYE administration involves the calculation of income tax using a tax code system. Each employee is allocated a tax code which consists of a number equal to approximately one tenth of the personal tax allowance as adjusted by the employee personal tax adjustments. Income tax deducted is calculated by the employer operating the PAYE scheme on a cumulative basis during the tax year by using either manual tax tables or a payroll software package. The tax table is arranged to determine the tax free allowance each pay week or month during the year according to the employee tax code.

To calculate the income tax the employer determines the cumulative tax free allowance in a specific week or month and deducts this allowance from the cumulative gross pay that employee is due at that tax week including current wages or salary and all previous income earned during the current tax year including any earnings from other employers. The employer is responsible for deducting the correct amount of income tax, issuing the employee a payslip to advise the income tax deducted and also for paying the income tax deducted to the tax authority. The second major area of PAYE administration is for employees to deduct national insurance contributions from employees. The amount of national insurance deducted is determined by looking up the employee gross pay on a national insurance deductions table. In addition to the employee national insurance contribution each employer also has to pay an employer national insurance contribution.

Details from the P45 also include the employee tax code that must be entered into the employee PAYE records to enable the new employer to calculate the income tax due to date.

If an employee does not hand the new employer a P45 then they are taxed on a week to week basis until the tax code and cumulative income tax position are known. Having engaged an employee and deducted income tax and national insurance contributions the employee must receive a payslip from the employer showing the gross pay, deductions and net pay. In addition every employer also has to complete a P35 which is the Annual Employers Return which lists the name of every employee, the income tax deducted and national insurance liability including employee and employer contributions.

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