0 A Guide to Employee Tax and NI

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Getting your employee tax and national insurance right can save you money and a nasty letter from the tax man, as well as fines and even court orders. Some employers do not understand the basics of employee tax and NI which then results in them overpaying their staff, or perhaps even underpaying them. This guide aims to help you better understand what is required of you, as well as how you can save money and avoid those nasty fines.

The Basics of National Insurance for Employers and Self Employed Workers

As an employer it is your duty to pay National Insurance Contributions (NIC) on the earnings your employees make from your business. This does not just cover their basic salary or cash, NIC must also be paid on benefits such as car allowances, holiday pay and so on.

If you are self employed, you will also have to pay your own National Insurance as well as income tax, which is worked out separately.

 There are 6 different classes of National Insurance, each one depends on your earnings, whether you are self employed or an employer and the benefits you can expect throughout the tax year. For more information on which class you fall into it is best to speak to an expert in chartered accounting.

When you, as an employer, operate your normal payroll system such as PAYE (Pay as You Earn) the NIC will be calculated at the same time. This only applies to your employee earnings however,
benefits will be calculated at the end of the tax year in April. All of the national insurance contributions must be paid to the HMRC (HM Revenue & Customs) or you could face a serious fine and even a prison sentence.

Ensuring that you are calculating your NIC correctly, for your employees or for yourself, is extremely important. If you overpay HMRC then you could be losing out on cash for your business, as they may take a long while for them to refund you.

Employee Tax and the PAYE System

Most businesses will be familiar with the PAYE (Pay as your Earn) system which is used by the HMRC to work out employee tax and NIC. If you are just starting up, or looking to hire your first employee then it is vital you understand the way that this works.

As an employer, it is your responsibility to deduct the right amount of employee tax through the PAYE system, as well as the national insurance contributions. The HMRC will expect you to pay what you have deduced either monthly or quarterly and failure to do so, or sending your payment late could result in fines or interest being added to your bill.

After the end of the tax year in April, the HMRC ask that every employer sends in an Employer Annual Return (Forms P35 and P14) which details all of your employees pay, taxes and NIC.

To ensure you are not stung with fines or interest from the HMRC (believe me, it happens a lot!) ensure that you have a professional look over your PAYE system with you and ensure that everything is as it should be. You may even look for an accountant to help you with you Employer Annual Return which will save you a lot of money in the long run!