Pay as you earn (PAYE) is how the government collects income tax from employees - including you if you are a director of your limited company. (It doesn’t apply if you’re a sole trader - you pay tax via your tax return if you’re self employed).
Each month (typically), you need to deduct send the right amount of income tax (and national insurance) from employees’ pay and send it to HM Revenue & Customs (HMRC).
There is lots more information about PAYE on the HMRC website.
Managing PAYE
You can manage PAYE yourself online, and HMRC sends you a CD to work out what you owe. Or you can get your accountant to do it for you. Or you can do it by paper (there used to be a rebate for doing it online, but that’s now finished).
You’re still liable for getting it right, even if you pay someone else to do it for you. So check what they do.
Working out PAYE
You’ll need a personal tax code to work out PAYE. This shows what tax to deduct each month - it takes account of personal allowances, tax owed from previous years and so on.
You’ll need to give any employees (even if just yourself)) a pay slip each time they’re paid.
And by the 19th (22nd if you pay electronically) of each month, you must have paid the tax you’ve deducted to HM Revenue & Customs (HMRC). (With average monthly payments under £1,500, you may be able to arrange to pay quarterly).
End of year
At the end of the tax year (by May 31), you’ll need to issue each employee with a P60 form that shows how much tax was deducted for the year. There are other annual returns, too. There’s more information here.
National Minimum Wage
Because there are tax advantages to paying yourself by dividends rather than salary, it’s tempting to pay yourself nothing. You can’t do this - you must comply with the national minimum wage laws.
Read your site and found some really interesting stuff. However my situation is I have a full time job but I’ve been getting requests to do work for other people in my spare time. In the longer term if I build up a client base I could leave my full time job and go fully self employed. But for now I want advice on setting up my own business/company and how to manage my tax situation as I will be getting two incomes and want to avoid higher rates of tax if possible. Any advice?
John - you need an accountant I would say. It all depends on how much you’re earning etc. But it is possible to be both employed (your main job) and self-employed (your other work) at the same time. That’s perfectly acceptable. However, you should also consider your contract with your employer - it might say something about this …