PAYE and National Insurance (NIC) for Barbers

If the barber shop employs staff, income tax and National Insurance contributions (NICs) will need to be deducted from their pay before they receive it. An employer needs to know how to calculate the correct income tax deductions, taking account of the various rates, allowances and limits that exist.

Pay As You Earn (PAYE) is the system used by HM Revenue & Customs (HMRC) – formerly the Inland Revenue – for collecting income tax from the pay of employees as they earn it. Part of the business tax obligations of an employer is to deduct income tax and (NICs) from employees’ pay and submit the deductions to HMRC.

Each month, the most recent amounts deducted from all employees’ pay has to be sent to HMRC, although if the average monthly payments are likely to be less than £1,500 it may be possible to pay these quarterly. Beware that if the payment is late or too little, the barbers may incur interest on these amounts or a fine.

A Daunting Task

When the barbers first starts to employ people, the business tax rules and regulations can be daunting. It is a challenge to deal with all the forms and procedures involved in organising the payroll and to learn all the necessary parts of the PAYE system as and when they apply to the business.

With so many other aspects of the business to take care of, many employers decide to use an accountant to handle the business tax issues. An experienced accountant can run the barber shop’s payroll and know what systems and forms to use, making sure none of the essential steps is missed out.

An alternative is to use a payroll agency, but remember the business will still be legally responsible for any mistakes. Some employers invest in a payroll software package, but it must comply with HMRC standards.

When to Apply PAYE

PAYE is applied to all payments an employee receives as a result of working for the barbers, including wages, overtime, shift pay, tips, bonuses, statutory sick pay, statutory maternity, paternity or adoption pay, certain lump sum and compensation payments - such as redundancy payments - and some expense allowances that are paid in cash. Employees are also taxed on benefits in kind, such as medical insurance.

If an employee receives any payments other than in cash, such as shares or vouchers, PAYE must be applied to the cash value of these items. Childcare arranged and paid for by an employer and childcare vouchers provided by an employer, up to a value of £55 a week, are exempt from tax and National Insurance, as long as the care used is registered childcare or approved home childcare, and where a childcare benefit-in-kind scheme operates it must be available to all employees.

Changing Rates

Most employees have to pay NICs as well as tax. Payment of NICs may entitle the employee to benefits such as a state pension and Jobseeker’s Allowance, and the class of NICs an individual pays can affect their entitlement to benefits. It should be noted that income tax and NIC rates and thresholds may change from year to year.

There is plenty of guidance available for employers. The HMRC provide a new employer starter pack that explains how to calculate tax and National Insurance deductions.

There is also a helpline with trained staff ready to answer any queries, or free confidential advice is available from local HMRC advice teams on a one-to-one basis at a location that suits the employer.