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Legal Obligations of Employers for Payment of Wages and Tax

Most employers must operate PAYE (Pay As You Earn) as part of their payroll.

This is how HM Revenue and Customs (HMRC) collects Income Tax and National Insurance from employment.

You will need to deduct tax and National Insurance from most employees’ wages.

Reporting payment and deductions

If you run your own payroll, you will need to report all payments (this includes things like tips, bonuses and sick pay as well as salary) and deductions for your employees to HMRC. You should do this on or before pay day. You will need payroll software in order to report to HMRC.

Your payroll software will calculate how much tax and National Insurance you need to pay. Free payroll software is available for companies with ten employees or fewer. For larger business there are is a range of paid-for software. All of these have been tested and recognised by HMRC.

You also need to keep HMRC informed if a new employee joins your staff, or if an employee’s circumstances change – for example, if they reach State Pension age or become a director.

Using a payroll provider

Instead of running your own payroll using payroll software, you can pay a payroll provider such as a bureau or account to run your payroll for you.

However, you are still responsible for keeping records of your employees’ details, although some payroll providers do offer this support.

You are legally responsible for completing your business’s PAYE tasks, even if you pay somebody else to do them.

Keeping records

The records you keep must be retained for three years from the end of the tax year they relate to. You may be charged a penalty of £3,000 if you do not do so.

If you have lost records that can’t be replaced, you should tell HMRC as soon as possible.

You can include figures in your final payroll report of the tax year that are estimated (that you wish HMRC to accept as final) or provisional (that you’ll update with later figures). You must make HMRC aware of which system you are using, however.

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