PAYE, which stands for pay as you earn, is the UK’s tax withholding system — administered by HM Revenue and Customs. Employers use this system to deduct income tax and national security contributions from their employees’ salaries.
Most employers with employees in the UK are required to register with PAYE. Not doing so can result in fees and penalties.
How does PAYE work?
How much tax is deducted will depend on different factors, including the employee’s salary, benefits, and tax-free allowances.
Employees are assigned tax codes based on these factors. Employers use these codes, as well as their employees’ income level, to calculate how much needs to be deducted.
The PAYE system requires employers to deduct taxes on a weekly, biweekly or monthly basis — depending on the employee’s pay schedule.
Not making the proper deductions through PAYE can result in legal actions for employers.
Do you always have to register with PAYE?
Most businesses with UK employees have to register with PAYE. It’s a way for HMRC to ensure that the right amount of income taxes and national insurance contributions are being deducted from employees’ payslips.
There are some exceptions, though. These may include the following situations:
- Paying employees salaries below the minimum threshold
- Hiring independent contractors and freelancers rather than full-time employees
- Employing family members only, provided the family members are proven to be genuine employees with reasonable salaries
- Offering only non-cash compensation
Complying with tax withholding systems for a global workforce
Just like the UK has PAYE, each country has its own unique tax withholding system.
For companies with global workforces, navigating and complying with these different systems can be time-consuming. Additionally, without the right expertise, it can leave them more susceptible to risks and fees.
That’s why a lot of companies with global workforces ensure they have the right strategies in place to tackle these challenges, whether it’s through interacting with local compliance experts or maintaining a bullet-proof payroll tracking system.
An effective way to cover these points could be through a global payroll provider, which can offer country-specific expertise on tax withholding system requirements and automate the payment process so that you don’t have to manually go through each employee’s tax payment requirements.