Should You Be Paying PAYE If You Are Self-Employed?

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Posted on May 02, 2017

Should I be paying PAYE?

Are you self-employed and asking yourself "Should I be paying PAYE?" We explain what PAYE means and whether or not you should be using it.

Being self-employed, you probably find yourself needing to fulfil a number of different roles from manager, accountant to marketer. One of the most confusing areas is tax.

Your tax liabilities can be complicated, and if you get them wrong it can land you in all sorts of difficulties. A term you hear a lot when discussing tax on earnings is PAYE. But what is it and how do you pay it?

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What does PAYE mean?

Pay As You Earn, or PAYE, is a means of paying income tax and national insurance contributions for those in employment. Typically when you do a paid job, your employer deducts contributions from your gross wage or occupational pension, prior to passing the net amount onto you in your pay cheque.

Come the end of the tax year, you receive a P60 form setting out the amounts paid to you together with any deductions. When using this system, tax payable on some other sources of income or anything else you owe to HMRC can be collected. If your affairs are more complicated and you have significant other income streams, you need to complete a self-assessment tax form.

Should I be paying PAYE if I’m self-employed?

As a rule, self-employed people do not pay income tax or National Insurance via PAYE. This is only done by your employer. If you don’t have an employer, you need to be registered for self-assessment.

Self-assessment of tax is something you need to do if you’re self-employed alongside your regular job, for instance if you work three days a week for someone else and then run your own business at other times.

PAYE is something you need to understand if you employ others or aspire to do so.

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Should I be using PAYE for my staff?

Not all self-employed workers employ staff, but some do. As your business grows, you may well start employing people to work for you.

As an employer you normally have to operate a PAYE system for paying people who work for you. This is the case if you employ anyone earning above the minimum threshold of £112 per week. However, even if all your staff earn less than this, you should keep thorough records.

For staff earning more than the threshold, PAYE is required on all payments of salary and expenses. It includes tax allowances, exemptions and reliefs for the full tax year. The amount to be deducted is determined by the tax code supplied by HMRC.

If administering payroll is your own responsibility as part of your business, you need to report employees’ payments and deductions to HMRC prior to each payday.

Summary of PAYE responsibilities

For most people who are self-employed, PAYE is not something to worry about. For tax purposes, your best course is to register for a self-assessment tax return. You’ll receive this soon after 5th April each year, the end of the tax year. Once it’s received you’re required to fill it in and return it by the deadline in order to calculate your own personal income tax and National Insurance liability.

As a self-employed worker, you only need to be concerned with PAYE if you employ staff. In this case you need to set up a payroll system and inform HMRC in line with their requirements.

Whether you’re self-employed and are uncertain about your tax responsibilities or an employer requiring a full payroll service, our specialists will be happy to run you through all your requirements, taking another worry off your mind.

If you need advice on paying tax, get in touch with our Tax team today on 08442 492 209 or contact them online.

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