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How to set up a company

PAYE & NIC

Pay As You Earn (PAYE) is the HMRC scheme by which employees pay their income tax and national insurance contributions (NICs).

There are two principal ways to extract money out of your company, either via a salary or a dividend. When your company pays you a salary, it must deduct your income tax and national insurance liabilities and pay these over to HMRC. This method and scheme is called PAYE.

In order to run a PAYE scheme, your company must be registered as an employer with HMRC. This is something a good accountant will help you with.

Once you are registered for PAYE, HMRC will issue the following, which are required for all payroll filings and communications with HMRC:

  1. Accounts Office Number
  2. Employer Reference Number

The main payroll duties you must fulfill as an employer are:

  1. Subtract and pay all employment taxes due to HMRC i.e. income tax and NIC from salaries.
  2. Submit an annual summary of all payroll and relevant deductions by 19th May via submission of form P35 and P14s for each employee.
  3. Declare any benefits in kind and expenses by 6th of July via submission of form P11d.

From April 2013, HMRC are introducing the Real Time Information (RTI) system. This means that the annual summaries will be replaced by live information, i.e. submissions will need to be made each time you are paid.

HMRC will come down on you heavily if you get any of these wrong, so ensure you instruct a competent accountant.

Key salary tax rates for 2012/13

Income tax rates

  • Each year you can earn £8,105, this is called your personal allowance. After your earnings go above £100,000 this is gradually reduced.
  • After your tax free salary of £8,105, the next £34,370 of salary is taxable at 20%
  • Above £42,475, salary is taxed at 40%
  • Above £150,000, salary is taxed at 50%

National insurance contributions

  • The NIC “secondary threshold” is £7,488. Up to this level of salary there are no national insurance contributions to pay, however, it can depend on when you start during the year and if you are a company director.
Any questions? Speak to one of our friendly accountants on 020 7969 2879.