PAYE stands for Pay As You Earn and is the system by which tax is deducted from employees or retirees during the current tax year. Employees and retirees are assigned a PAYE code that indicates the tax's value to be withheld.
The PAYE process involves three parties: HMRC, your pension provider or employer, and you.
PAYE is the most commonly used system for tax deductions. The frequency of tax deductions depends on the frequency of payment. Most employees and retirees will benefit from a weekly or monthly tax deduction. There are cases where retirees are paid quarterly or annually, in which case they will be taxed depending on when they are paid.
How PAYE works ?
The tax regulator, HMRC, initiates the process. HMRC:
Calculate a tax number for you
Issue you a P2 form which will tell you your tax number. This form will also show how they calculated your social security number. If HMRC is not required to issue you an encryption notice, you can still request one.
Contact your employer to inform them of your social security number. That said, they won't show HMRC how your social security number was calculated.
Your employer or pension fund will then use your social security number to calculate how much to deduct from your salary or pension for taxes. They will pay this money and any national insurance contributions, if required, to HMRC.
Employers and social security institutions have systems and procedures that allow them to use a specific tax number at the time of payment. Therefore, it is of the utmost importance to confirm that the employer or pension fund has informed HMRC of their adjusted income.
If you start receiving new income, you can expect to see an updated tagging notice from HMRC to let you know of any changes to your social security number. It is crucial to ensure that your employer handles tax numbers issued by HMRC. This can confuse pensioners if they have multiple sources of income from more than one pension. It is important to ensure that budget codes that have been published actually have the right amount of taxes.
If you are an employee, you get a paycheck each time you are paid. Your paycheck may include the Social Security number that your employer used to calculate the amount of tax to deduct from your gross pay. If you're on a pension, you generally won't get a paycheck every time you get paid if your social security number changes; HMRC must fully notify it.
Tax year end
If you are an employee or retiree, an "end of year certificate" (p60 or equivalent) must be issued before May 31. The date on which the fiscal year ends is April 5. The P60 will show your salary or pension and the tax deducted during the year, along with the final tax number used. Your employer or pension provider will provide the same information to HMRC.
How can EDA Professional Services can help ?
To find out how EDA Professional Services can help you with PAYE and for any questions you may have, please do not hesitate to contact us.