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The PAYE Scheme & PAYE Coding notices

"Employer responsibility to make payment of tax and national insurance deducted to H M Revenue & Customs."


The PAYE scheme is fundamental to the operation of a business which has employees. This includes companies where the only employee is the company director/shareholder.

PAYE is a method of collecting tax from employees during the course of the year. For the vast majority of employees the tax collected will be the amount they are due to pay for any one tax year. However, this is not always the case and some employees, mainly company directors, those receiving employer provided benefits and those with a second employment or a pension may find at the end of the year they have an underpayment or overpayment of tax.

Underpayments of tax are unwelcome and to a certain extent so too are overpayments as these beg the question why did I overpay in the first instance.

The cornerstone on ensuring the correct amount of tax is deducted is the PAYE coding notice. These notices can never be guaranteed to be 100% accurate as they are often based on historic information. To avoid any material inaccuracies with tax being paid as you go and thus assisting personal cash flow is to ensure the correct PAYE code is in use.

Agents no longer receive PAYE tax codes showing the detail of the allowances granted and restrictions imposed and these should be checked as soon as they are received and if there is any uncertainty, advice should be taken and the code corrected as soon as possible. In addition any change in circumstance such as the receipt of a new source of income or pension should also be a trigger for considering, in detail, the tax code with corrective action taken as necessary.

With the advancement in computer technology H M Revenue & Customs are taking full advantage and are imposing more burdens on the employer in respect of penalties for late payment of monthly or quarterly PAYE and have now introduced “real time” returns of employee deduction details, with the system now in full operation.

In order to ensure they can take full benefit of the new penalty regime, H M Revenue & Customs will be introducing real time returns of the amounts due. This is similar to the scheme operated by employers who are required to make returns under the construction industry scheme. It is proposed that the new scheme will replace the annual return requirement such that each tax month an employer will be required to make a return of the deductions made. This will ensure that the correct PAYE & NI is accounted for at the right time making manipulation of payroll records difficult. The scheme is currently undergoing pilot testing and is hoped to be in full use next year.



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Telephone: 0151 644 4848