What's the importance of my employee's tax codes?

 16 Aug 2018

Though it may be considered a rather annoying task, the importance of doing your taxes and the benefits of having all your data up to date is undeniable, especially when it comes to having employees on the wrong tax code. Many small/medium size companies are constantly struggling with this issue and have decided to utilise professional payroll providers to ensure the correct regulations are met. By doing this, business owners can then concentrate on running and grow their businesses without the worry of incurring any fines or penalties. 

But’s what is included to ensure the correct tax code is implemented?

All employers must use Pay As You Earn (PAYE) as it is the only tool to collect Income Tax and National Insurance (NI). This process is to be performed by the employer or a qualified department meaning employees should not be the ones sending annual tax returns and dealing directly with Her Majesty's Revenue and Customs (HMRC) for these taxes. However, during this process, you need to remember that this applies exclusively to employees. Contractors and self-employed individuals act as their own employers and may have supplementary considerations. 

It is important to mention that any mistakes or errors during this process are usually penalised by HMRC and the companies are the ones who must respond and pay such fines, not the employee. This highlights why many businesses are using payroll bureaus to fulfil their requirements and offer more benefits. Unfortunately, these fines can be considerable, showing the importance for companies to be fully competent in understanding how PAYE works or outsourcing their payroll to a professional provider. Your professional provider will be able to identify such issues and offer a smooth payroll process, so you pay your exact tax requirements.

A key element is to have the right PAYE tax code for each employee, but there may be different conditions which vary their tax code category. Professional payroll bureaus can also take care of this issue for companies so you can focus on your business rather than the payroll processes consuming your time.

But, where do PAYE Tax Code’s come from?

The code you use on each employee can either come directly from the HMRC (meaning that it was calculated and issued by them) or the employee can also use a standard PAYE tax code after following HMRC instructions. If it's a new employee, the new employer usually uses the same code used by the previous employer. 

The code is contained in a P45 form that the former employer gives to the employee so he/she then can give this form to the new employer. If there´s no P45 form from the employee - may be that the employee is working for the first time, or the former employer hasn't issued one on time - the new employer should determine the new PAYE Tax Code through a Starter Checklist, which is a questionnaire the employee should answer.

Professional payroll bureaus have the knowledge and experience to ensure the starter checklist is completed correctly to prevent the wrong tax code being assigned and the company and employee owing additional tax at the end of the financial year.