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Employers and particularly new employers ask a variety of questions in administering the PAYE scheme. The top questions and answers include tax codes, week 1 basis, employee or self employment status, national insurance, statutory sick pay and what happens when an employee does not provide a P45 from previous employment.

What is an income tax code?

An income tax code is a reference number which may also include letters or be entirely letters which determines the amount of gross pay which is free of income tax deductions and may also determine the way in which income tax should be deducted. If the tax code contains a number this number represents the amount of tax free income an employee can earn in a financial year, for example 522L means an employee has a tax free personal allowance of 5,225 pounds. A tax code of BR means all the employee gross pay should be taxed within the PAYE scheme at the basic rate of income tax.

What does week 1 of month 1basis mean?

Week 1 and Month 1 basis is an instruction to the employer operating a PAYE scheme to not calculate the income tax on a cumulative basis which is the normal basis but instead the employer has to calculate the income tax to be deducted on a non cumulative basis. A non cumulative basis is the total gross pay for that week or month excluding any previous pay in earlier pay periods regardless of whether that previous gross pay was paid by the current or a previous employer.

Because the income tax is deducted on the gross pay in a specific pay period an employee on a week 1 or month 1 basis does not receive an income tax refund in respect of previous tax deductions. Normally an employee is placed on a week 1 or month 1 basis when the tax deductions history for the current financial year are incomplete and the week 1 month 1 basis is removed when the missing history is determined

Do I deduct income tax and national insurance if a new starter says they are self employed?

The decision as to whether a worker is an employee or self employed rests with the employer responsible for the PAYE administration. If that worker is determined to be an employee then income tax and national insurance deductions must be deducted from payments made to that employee.

If the employer decides that the worker is self employed then no income tax or national insurance deductions should be made from the payments. But it is not as simple as that and any employer who has doubts should clarify the position with the local Inland Revenue helpline. A wrong decision by the employer could be very costly and strict rules are enforced.

There are numerous conditions which are applied to determine if a worker is an employee or self employed and several years after that worker joined the business the potential tax liabilities can come back to haunt the employer. The tax authority can invoke a number of conditions any one of which if proved can result in the tax authority deciding the status of a worker is that of employee and not self employed.

When the status of a worker is determined by the tax authority to be employee and not self employed the employer will incur a liability for income tax and national insurance that should have been deducted from the employee and also a liability for employers national insurance contributions. The liability being increased as the Inland Revenue will determine that the amount paid to the employee was a net wages payment after deductions and the perceived gross pay thereby enhanced.

As the income tax and national insurance contributions may not be practically recoverable from the employee and the calculation would be applied retrospectively to previous years employment the cost to an employer can be considerable.

When should national insurance contributions be deducted from an employee?

National insurance must be deducted from all employees who are over the age of 16 and under the state retirement pension age of 60 for a woman and 65 for a man. Equality of employment does not apply to government legislation on equality of employment between men and women where national insurance contributions and pension payments are concerned.

In addition national insurance should only be deducted from an employee wage or salary if that income is at or above the national insurance earnings threshold. The earning threshold usually changes each year and should be checked in case of doubt with the current tax thresholds applicable.

What do I do if my new employee does not give me a P45?

If the new employee either does not possess or has lost the P45 from a previous employee then the employer operating the PAYE scheme must still deduct tax and national insurance from any wages payments made to that employee and also advise the Inland Revenue to establish the tax status of the employee. If the employee does not have a P45 the employer must complete a P46 and send the P46 to the Inland Revenue without delay. Following receipt of the P46 the Inland Revenue will notify the employer of the income tax deductions to be made.

In the period from when the employee commences employment and notification of the employee tax status is received the employer should adopt a week 1 or month 1 status for that employee and also use an emergency tax code. The emergency tax code would be the standard personal allowance for that tax year.

Is a medical certificate required before statutory sick pay payments are made?

It is advisable for an employer to obtain from an employee written documentation of sickness. This documentation can be in the form of self certification which should be filed as part of the PAYE administration. If an employee satisfies all the conditions to receive statutory sick pay and there is no reason for the employer to doubt the claim then strictly speaking statutory sick pay can be paid without medical evidence.

How as an employer do I fund working tax credits?

Working tax credits an employer may pay to an employee is deducted from the PAYE and other deductions that employer has made and is payable to the Inland Revenue. Eligible deductions include deductions from employees in respect of income tax, national insurance, student loans and CIS deductions and employer national insurance contributions. If the deductions are insufficient to cover the tot6al working tax credit to be paid to an employee the employer can apply to the Inland Revenue who will fund the shortfall.

Why the employer is charged penalty fines when the accountant submits the tax returns?

Penalty fines are chargeable to the employer responsible for submission of the annual PAYE tax returns. The responsibility for submitting the tax returns on time to avoid penalties may be delegated by the employer to the accountant. That is regarded as an internal arrangement between the parties which is not recognised by the income tax regulations with the employer always retaining the ultimate responsibility for submitting tax returns on time.