New employees: tax and NICs it’s elementary, my dear
Paul Tew, freelance advisor on payroll issues, begins a series of articles covering the basics of payroll. This article covers the PAYE and NICs processes for a new employee
Employment status When considering paying a new employee, the first question for an engager to decide is whether the person is an employee or not.
Employment status depends on the terms of the contract. A contract of service normally means the individual is an employee, where work is performed, without the risks associated with running a business. A contract for services, where a person is in business on their own account, usually indicates self-employment. What the parties to the contract consider the working relationship to be may not be conclusive.
Employment status is not a matter of choice for either party; it is a matter of fact based on an overall evaluation of the contract detail and working arrangement in practice.
PAYE scheme
A new employer needs to register with HM Revenue & Customs (HMRC) in advance of an employee’s first pay date. HMRC will then set up a pay as you earn (PAYE) scheme, issue an Accounts Office reference and a PAYE reference for the employer’s future use.
If all employees including directors receiving earnings are paid below the lower earnings limit (LEL) for national
insurance contributions purposes during the tax year, there is no requirement for a PAYE scheme. If there is no PAYE scheme, there are no real time information (RTI) reporting requirements to HMRC. However, if an employer is required to operate PAYE, where at least one employee is earning at least the LEL, then under RTI all payments of earnings to all employees must be reported, even where an employee earns less than the LEL.
HMRC reporting
Employers can set up a new employee on a payroll prior to making the first payment and sending a full payment submission (FPS) report to HMRC. The permanent data needed is the employee’s full name, gender, date of birth, full address, national insurance number (NINo) and the employment start date.
If a new employee is unable to provide
a NINo, either via an old payslip or P60 certificate, employers can send a NINo verification request (NVR) via a payroll submission to obtain the correct number a few days after sending the first FPS report. A NINo is not a passport to work in the UK. All employers have a duty to prevent illegal employment by undertaking document checks to confirm if a person has the right to work in the UK.
All employee information supplied
...MATTER OF FACT BASED ON AN OVERALL EVALUATION OF THE CONTRACT DETAIL AND WORKING ARRANGEMENT IN PRACTICE
28 PayrollProfessional
must be accurate as it is used by HMRC to match a new employment to the individual’s PAYE record. It is also necessary to enter a starter declaration on the new employee’s first FPS. Employers need only include a starter declaration on the FPS the first time a new employee is paid. For tax year 2014/15 if the new employee provides a form P45 and the leaving date is: l 6 April 2013 or later, the employer selects the starter statement when completing the FPS l 5 April 2013 or earlier, the employee must provide a full starter declaration. The starter statements are one of the following letters: l A – This is my first job since 6 April. l B – This is currently my only job. l C – I have another job or pension.
Form P45 received The P45 information to be entered on the new employee’s payroll record is: l leaving date from the previous employment l tax code (including week 1/month 1, if appropriate) l total pay and tax paid to date for the current tax year l student loan deduction status (if applicable).
Employers must always check the figures on the new employee’s P45 as these are used in the first PAYE tax calculation.
If the P45 figures are incorrect, use the correct figures on the payroll record. If there is a week 1/month 1 indicator on the P45, enter ‘nil’ as the previous pay and
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