How to Handle Payroll and PAYE for Your Limited Company | Complete Guide
How to Handle Payroll and PAYE for Your Limited Company
When you run a limited company, managing payroll and understanding PAYE (Pay As You Earn) are essential aspects of your responsibilities. Not only does this involve paying your employees correctly, but it also ensures compliance with UK tax laws. Payroll involves calculating salaries, wages, tax deductions, and National Insurance (NI) contributions, while PAYE is the system used by HMRC to collect Income Tax and National Insurance from employment income.
In this guide, we’ll walk you through everything you need to know about handling payroll and PAYE for your limited company. From registering for PAYE to making the necessary submissions, we’ll cover all the essentials for smooth payroll management.
What Is PAYE (Pay As You Earn)?
PAYE is a system used by HMRC to collect Income Tax and National Insurance contributions (NICs) from employees’ earnings. As an employer running a limited company, you are responsible for operating the PAYE system to ensure that these deductions are made and paid on behalf of your employees.
The PAYE system works by deducting tax and National Insurance contributions from employees’ wages before they are paid. The amount deducted is based on each employee’s tax code and income level.
When you run payroll for your limited company, you’ll need to submit details to HMRC regarding the deductions and payments you’ve made, which must then be paid over to HMRC on time.
When Should You Set Up PAYE for Your Limited Company?
You need to set up PAYE as soon as you hire an employee, even if you are the only employee of your limited company. Here’s when you should set up PAYE:
- Hiring Employees
Once you take on employees (including yourself as a director), you must set up PAYE to process their salaries. This applies even if you are paying yourself a salary from the business.
- Your Employee’s Income Exceeds the Personal Allowance
You must also operate PAYE if your employee’s income exceeds the personal tax allowance. Even if you pay your employees less than the personal allowance, PAYE registration may still be necessary, depending on your circumstances.
Steps to Set Up PAYE for Your Limited Company
To set up PAYE, follow these steps:
- Register with HMRC
You must register your limited company with HMRC to operate PAYE. This should be done before you make your first payment to employees. You can register online with HMRC or, if you’re already running payroll, through your payroll software. You’ll need:
- Your limited company’s details (Company Name, Company Number, etc.)
- Details of the employees you intend to pay
Once registered, HMRC will provide you with a PAYE reference number that you’ll need for future submissions.
- Get Payroll Software or Use the Free HMRC Software
You can manage payroll manually, but using payroll software is recommended to simplify the process. Many providers offer software that integrates directly with HMRC, making it easier to submit payroll details and calculations. If you’re processing a small number of employees, you may also use HMRC’s free payroll software.
- Collect Employee Information
Before you can pay your employees, you must collect the following information:
- National Insurance Number: Employees need this number for tax purposes.
- Tax Code: This tells you how much tax to deduct from your employee’s earnings.
- Bank Details: For salary payments.
New employees will need to fill out a Starter Checklist or provide a P45 from their previous employer. This will help you determine their tax code.
How to Process Payroll for Your Limited Company
When running payroll, here’s what you need to do:
- Calculate Gross Pay
The gross pay is the total amount your employees earn before any deductions. This includes their base salary, overtime, bonuses, and any other income or allowances.
- Deduct Income Tax
Income tax is calculated based on the employee’s tax code and their earnings. In the UK, there are different tax bands that apply based on annual income:
- Personal allowance: The first £12,570 is tax-free.
- Basic rate: Income between £12,571 and £37,700 is taxed at 20%.
- Higher rate: Income between £37,701 and £125,140 is taxed at 40%.
- Additional rate: Income above £125,140 is taxed at 45%.
Use your employee’s tax code to determine how much tax to deduct.
- Deduct National Insurance Contributions (NICs)
Both employees and employers pay National Insurance contributions based on earnings. The NICs are split into Class 1 contributions:
- Employee NICs: Deducted from the employee’s wages, based on their earnings above the NIC threshold.
- Employer NICs: Paid by the company based on the employee’s earnings.
The rates for NICs depend on the income level and employment status.
- Other Deductions
In addition to Income Tax and NICs, you may need to make other deductions from your employee’s salary, including:
- Pension contributions: Under auto-enrolment, employers must set up a pension scheme and contribute a percentage of employee earnings.
- Student loan repayments: If your employees have student loans, these deductions must be made once their earnings exceed the repayment threshold.
- Net Pay
After all deductions are made (Income Tax, NICs, and other deductions), you will calculate the net pay, which is the amount to pay your employee.
