Understanding Business Accounting For Dummies, 2nd Edition (21 page)

We don't want to get into a debate about the National Insurance system and the financial problems it's facing; we'll just say that the amount you'll pay in National Insurance almost certainly won't diminish in the future. Here's an idea of what a business pays in National Insurance: In 2008, the first £5,200 of annual wages were exempt from any National Insurance charges. Then up to a ceiling of £34,840 the employer pays 12.8 per cent and the employee pays 11 per cent. Above £34,840 comes the big divide. The employee now only pays 1 per cent National Insurance, whilst the employer still keeps shelling out at the 12.8 per cent level.

That is, for every £100.00 paid to an employee above the basic level of £100 per week, the employer's total cost is £112.80. (Tell
that
to Nigel in Marketing the next time he gripes about the tax deductions in his pay cheque!)

Employment tax

Employing people requires you to manage a PAYE (Pay As You Earn) system. If your business is a limited company, the owner (you) is also liable for PAYE. You will also have to deduct National Insurance. Both these tasks will involve some additional record keeping, as once again owner managers are being asked to be unpaid tax collectors. There are serious penalties for getting it wrong.

PAYE

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. If the business is run as a limited company, then the directors of the company are employees. PAYE must be operated on all salaries and bonuses paid to them, yourself included.

HM Revenue and Customs now issues booklets in reasonably plain English, explaining how PAYE works. The main documents you need to operate PAYE are:

Form P11,
a deduction working sheet for each employee.

The PAYE Tables.
There are two books of tax tables in general use, which are updated in line with the prevailing tax rates.

• Pay Adjustment Tables show the amount that an employee can earn in any particular week or month before the payment of tax.

• Taxable Pay Tables show the tax due on an employee's taxable pay.

Form P45,
which is given to an employee when transferring from one employment to another.

Form P46,
which is used when a new employee does not have a P45 from a previous employment (e.g., a school-leaver starting work for the first time).

Form P60,
which is used so that the employer can certify an employee's pay at the end of the income tax year in April.

Form P35,
the year-end declaration and certificate. This is used to summarise all the tax and National Insurance deductions from employees for the tax year.

Form P6,
the tax codes advice notice issued by the Inspector of Taxes telling you which tax code number to use for each employee.

You can find tables giving details of PAYE and NIC rates and limits for the current tax year, for every conceivable category, at the HM Revenue and Customs Web site (
www.hmrc.gov.uk/employers/employers-pack.htm
).

Taxing everything you can put your hands on: Property taxes