Your Legal Obligations

If you employ any staff at all, you will need some system to record wages payments. You must by law deduct income tax and national insurance contributions from payments made to your employees where appropriate. You should contact the local Inspector of Taxes and ask him to set up a PAYE scheme for your business so that you can make the appropriate deductions and pay the tax and national insurance contributions to the Collector of Taxes as necessary.

For 2006/2007 if your employee earns more than £97 per week from you, then you must deduct national insurance contributions. For a single person with no other employment, tax is payable when the earnings exceed approximately £97.00 per week. (The exact figure will depend upon his/her entitlement to personal taxation allowances.) Consideration should also be given to the National Minimum Wage regulations (see page 99.)

Working Out The Wages

The steps for calculating wages are:

• calculate gross pay
• calculate deductions – income tax and national insurance
• calculate net pay.

 

Figure 30 shows it all in diagrammatic form.

Gross Pay

The gross pay of an employee can be worked out in one of several ways. The most common methods are:

Fixed Weekly Or Monthly Amount

The employee works a set period each week/month and is paid at a fixed rate each week/month. This is commonly the case for office and shop workers.

 

At An Agreed Rate Per Hour

The employee keeps a record of the hours worked and is then paid at a fixed rate for each hour that they work. This system is common, for example, in engineering works. Normally the record is kept by means of a time clock (’clocking in and out’) but a manual system can work just as well in a smaller business.

At An Agreed Rate Per Unit (Piece Work)

The employee is paid for the number of items that they handle during the course of the week. An example might be a sewing machine operator in a garment factory. The employee might be paid l0p for each sleeve that they sew into a garment during a week. Normally the system works by using a numbered slip, consisting of a number of perforated tickets. Each ticket relates to a specific task; for example, cutting the fabric or sewing the garment.

The slip is attached to the cloth as it is laid out for cutting; as it passes through the various processes each worker collects the appropriate ticket. At the end of the week the tickets held by each employee are counted and the wages calculated accordingly.

Deductions From Wages

Having calculated the gross pay entitlement, you next need to work out the deductions (stoppages) from each employee’s wage. There are two main deductions:

• income tax
• national insurance contributions.
• You may also need to deduct sums for trade union dues, sickness benefit schemes, pension scheme contributions, and so forth.

Income Tax

Income tax is collected from employees through the PAYE system, or Pay As You Earn. The employee’s liability to income tax is collected as it is earned instead of by tax assessment at some later date.

Strictly speaking, PAYE is a method of tax collection, not tax assessment. However, in most cases the system collects roughly the right amount of tax. Accordingly the Inspector of Taxes does not normally need to raise a formal assessment of Income Tax, but will do if the amount collected through PAYE is substantially incorrect.

If a tax assessment is needed credit is given for the amounts already collected through the PAYE system.

From your viewpoint as an employer you must:

• Make the appropriate deductions of tax from your staff’s wages.
• Keep a suitable record of the amounts paid to your staff and the amounts deducted.
• Account to the Collector of Taxes for the amounts of tax due each month.
• Prepare the returns at the end of the tax year, detailing the payments made to each of your staff and showing the amounts deducted.