PAYE continues to be a key part of how tax is managed in the UK, with it playing a significant role in how income tax and National Insurance are collected from employees. But what does PAYE mean, and what is its purpose? To help both you and your staff understand what PAYE is and how to correctly manage and pay it to remain compliant, we’ve put together this useful guide which contains all you need to know.
What Is PAYE?
PAYE is the system used by the UK government to collect income tax and National Insurance contributions from employees’ wages, pensions, and other forms of income. These deductions are then directly passed on to HMRC.
It’s used so that taxes are collected at the source of income, so employees don’t have to deal with paying taxes directly. For as long as employees are employed, employers, or chartered accountants, handle the deductions and submit them to HMRC.
What Does PAYE Stand For?
PAYE is known as Pay As You Earn, it will be located on your monthly or weekly payslip and is HMRC’s system to collect income tax. Income tax is used by the government to provide services such as health care, defence, and education.
What Is PAYE on a Payslip?
A payment reference number is specific to the type of tax and the accounting period for which you are making a payment. The characters in your payment reference number tell HMRC where to allocate your payments, which helps them process your payments as quickly as possible.
Your online banking service may default to a previous payment reference, so be sure to check this is right every time you pay HMRC.
HMRC want to help you get this right. You can use the ‘Pay now’ tool to find the correct reference number to use each time.
How to Find and Use Your PAYE Reference Number
If you are paying on time for the current period, you will need to use your 13-character Accounts Office reference. You can find this on:
- The letter HMRC sent you when you first registered as an employer.
- The front of your payment booklet.
- The letter from HMRC that replaced the booklet.
- Your business tax account, if you’ve already added Employer PAYE enrolment to it.
If you are not paying for the current period, you need to add four extra characters to the end of your Accounts Office reference. These final four characters will show the year and the month or quarter your payment is for. You will need to enter all 17 characters without any spaces:
- Characters 14 and 15 are for the tax year — for example, ’23’ for the tax year running from 6 April 2023 to 5 April 2024, or ’24’ for the tax year from 6 April 2024 to 5 April 2025.
- Characters 16 and 17 are for the tax month or quarter, depending on how you pay – you can use the ‘Pay now’ tool to find out which characters to include.
Why You Should Check Your PAYE Reference Number
If you make PAYE payments to HMRC, you should check that your payment reference number is correct every time. If you use an incorrect reference number, your payment may not be recognised. This can lead to penalties and charges being issued even if you paid on time, and you will need to call HMRC to correct any errors.
How Much PAYE Should I Pay?
Each tax period has a different payment reference number, so it’s important to make separate payments for each period.
For example, to pay for the month ending 5 June 2022 (month two of the 2022 to 2023 tax year), add the four extra characters 2302 to the end of your Accounts Office reference – 23 to tell HMRC it’s for the tax year ending 5 April 2023 and 02 to tell them it’s for month two.
Further help and support can be found over on the government PAYE website.
PAYE Assistance at Kirkwood Wilson
If your staff need assistance with pay slip advice, we offer a wide variety of business advice and payroll information to help them manage their payments correctly. For your business, we are able to make managing PAYE and your payroll processing all the simpler with our payroll accounting and digital accounting software.
Our experienced accountants can take care of running your payroll entirely, ensuring that PAYE information is all reported correctly to HMRC, alongside calculating staff wages, managing National Insurance contributions, and making sure your payroll is correctly and fully organised.
If you’d like to know any more about our payroll services or any of our other accounting services for businesses, get in touch with us today. A member of our team will be happy to discuss your best-suited options with you.
