How does PAYE work for tradespeople?
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Pay as You Earn, or PAYE, is the way you pay tax if you’re an employee. This is different to how self-employed people pay tax so if you’re an employee it’s important you understand how it works...
The Pay as you Earn scheme, which you’ll usually hear referred to as PAYE, is the way employees in all sectors pay tax and National Insurance to HMRC.
Any business or individual who employs people via a contract of employment is obliged to operate a PAYE scheme and deduct tax and National Insurance before passing those deductions on to HMRC.
If you’re an employee your tax will be paid via PAYE which is different to the way tax is paid if you’re a subcontractor, which is through the CIS scheme.
What does PAYE mean for employers?
If you’re an employer, it’s important you know the difference between your ‘employees’ and people you subcontract.
Employees’ tax is paid via PAYE so you’ll have to set up the administration of a payroll scheme and all the necessary reporting to HMRC, whereas subcontractors’ tax is paid via the CIS scheme which is slightly different.
Employees also have certain employment rights and receive certain payments. Payments to employees include their salary or wages, as well as things like any tips or bonuses, or statutory sick or maternity pay. You’ll also have to make certain deductions like tax and National Insurance and, in some cases, student loan repayments or pension contributions.
Administering PAYE can be time-consuming and it’s important you meet all the right deadlines and requirements for reporting.
Some employers choose to outsource their PAYE to people who run it for them, but you can do it yourself. If you run your payroll yourself, you’ll need to report your employees’ payments and deductions to HMRC on or before each payday.
For more information on PAYE for employers, visit the HMRC website.
What does PAYE mean for employees?
As an employee, you’ll pay income tax and National Insurance contributions via PAYE. This means your employer will deduct them from your wages and is responsible for sending them to HMRC.
The amount you pay in tax will depend on how much you earn and whether you're eligible for the personal allowance - the amount you’re allowed to earn tax-free each year.
HMRC will use a tax code to tell your employer how much tax to deduct from your wages and works this out based on certain information from you.
If it doesn’t have the right information, your employer will be told to use an emergency tax code until more information is received and the tax code can be adjusted. If you have paid the wrong amount of tax it will be adjusted later.
PAYE means your tax gets deducted each time you get paid, rather than you paying it in a lump sum once a year which you do if you pay tax via Self Assessment.
Each payslip will show your pay, what was deducted for tax and National Insurance contributions as well as any other deductions from your pay.
At the end of the tax year, you’ll get a P60 which shows the total amount paid to you over the previous tax year and what was deducted.
PAYE makes life a lot easier for employees, but can add extra headaches for employers - but as long as you’re organised and know what’s needed, you can stay on top of it and keep your business running smoothly.