The UK Pay As You Earn (PAYE) system is fairly straightforward. Your earnings are calculated per pay period and taxed at source according to the tax tables. Income Tax and Employees National Insurance is deducted and the remainder is paid to the employee. Your employer will also have to make their Employer contributions to national insurance as well as any statutory pension contributions with each pay run. Your employer will issue you with a payslip (see our payslip template) every month. For the employee there is very little work involved.
You can calculate your PAYE earnings or compare it to other contractor payment methods like umbrella companies. Employers can use our payroll tax calculator to work out the employers national insurance cost for their employees.
PAYE for Contractors
It is important to note that each payment is taxed as through you will earn that same amount for the remainder of the tax year. This means if you finish work before the end of the tax year, or have a month where you get much more than usual (for example if you are paid a bonus), you will have to wait until after your tax return has been processed to receive a rebate. This is often bad for contractors because there billing rate and monthly earnings will generally fluctuate. For example if you take an annual vacation or have downtime between contracts this will push your annual income down, but you will still have been taxed as though you worked the full year.
If you would like to know more about PAYE or get a quote from a leading UK contractor payroll provider, please get in touch.