Chapter 4 PAYE Flashcards
What is the PAYE system?
Pay As You Earn (PAYE) is HMRC’s system for collecting income tax and National Insurance Contributions (NICs) from employees.
How does the PAYE system work?
The employer deducts tax and NICs directly from employment income or occupational pensions on behalf of HMRC.
What is the primary aim of the PAYE system?
To ensure that the correct amounts of income tax and NICs are paid on cash payments to employees.
What types of payments does PAYE apply to?
- Salaries
- Bonuses
- Certain assets that can be readily converted into cash
When are income tax and NICs deducted under PAYE payable to HMRC?
17 days after the end of the tax month.
What is the duration of a tax month in the PAYE system?
From the 6th of one month to the 5th of the next.
When is payment generally required by for PAYE deductions?
By the 22nd of each calendar month.
What payment frequency can employers use if their average monthly total of PAYE income tax and NICs does not exceed £1,500?
Quarterly payments.
What are PAYE codes?
Tax codes that determine PAYE income tax deductions based on allowances and deductions.
What document does an employee receive that includes the PAYE coding notice?
Form P2.
What document does the employer receive regarding PAYE codes?
Form P9(T).
How is a tax code calculated?
Net allowances = (Total Allowances) – (Total Deductions).
What does a tax code with an ‘L’ indicate?
The basic personal allowance applies.
What happens if a marriage allowance election is made?
Personal allowances for tax code purposes become £11,310 and £13,830, and the letters change to ‘N’ or ‘M’.
In exam scenarios, what assumption should be made about the taxpayer’s marital status?
Assume the taxpayer is single unless told otherwise.
What is Zack’s PAYE code if he earns £18,000 and has taxable benefits of £12,777?
K19.
What does a negative net allowance indicate in PAYE coding?
The allowances are negative and require specific adjustments to form the tax code.
What is Beth’s PAYE code if she earns £14,000 and has unpaid tax of £300?
1107L.
What is Real Time Information (RTI) in the context of the PAYE system?
A requirement for employers to inform HMRC about tax, NICs, and deductions every time they pay an employee.
What does RTI replace?
Many older paper forms.
How do modern payroll systems operate under RTI?
They calculate income tax and NICs each pay day using the employee’s income and PAYE code.
