Pay As You Earn (PAYE) System: Advantages and Disadvantages

Pay As You Earn (pay as you earn) System Advantages and Disadvantagespay as you earn (Pay as you earn) was initial introduced in year 1944. This is a system used by HMRC (HM Revenue Customs) to collect Income Tax and NICs (National Insurance contributions) from employees pay, including directors of limited companies, as they earn it.OPERATION OF PAYE SYSTEMnether PAYE system, employers be responsible to deduct both Income Tax and NICs from employee when paying them their wages or occupational subvention. Employers argon required to manipulate PAYE on the allowances make to employee if the employees earnings r individually the LEL (National Insurance Lower Earning Limit). For value year 2010-11 (6th April 2010 to 5th April 2011), LEL is 97 a week, 421 a month or 5,044 a year. The levy rate charged for earning not more(prenominal) than 37,400 is at 20 part, earnings more than 37,400 but less than 150,000 is at 40 percent and earning above 150,000 is at 50 percent.A revenu e code and National Insurance category letter determines the amount of income revenue and NICs deductable from employees wages or pension allow be issue by HMRC. Employees with earning less than 110 are exempted from making NICs. Employees with earning more than 110 but less than 844 per week provide pauperism to pay 11 percent and employees with earning is more than 844 per week will regard to pay 1 percent.Before the tax year starts, usually in January or February, forms P9T or P9X will be given to employers to tell them about the tax codes that to be use for each employee. In the event if HRMC do not view enough information to issue a full tax code to employers, employers will then be told to use the emergency tax code until more information is received and the tax code privy be adjusted.A tax code is usually made up of virtuoso or more numbers followed by a letter. By multiply the number by ten, the employee will be able to obtain his heart and soul income earn in a tax year before any tax deduction. The employee will be getting the similar take-home wages each week or month as the tax code spread this tax-free amount equally over the year. See appendix for the common tax letters. Any falsifys example, employee receiving a number income, employers are expected to inform HMRC accordingly, as this will affect the tax code.Employers were to provide each employee a pay-slip or pay statement at or before the payday and pay HMRC the income tax and NICs by nineteenth of each month or by the 22nd if payment is made through electronic. Employers whose payments to HMRC do not exceed an average of 1,500 are allowed to make quarterly payments. If the correct amount was not beam in or late sent in, interest whitethorn be charged.At the end of each tax year, 5th April 2011, form P60 stating the summary of the employees pay and deductions is to be provided before 1st June following the end of the tax year, 1st June 2011. After the end of the tax year, no late r than 19th May 2011, employers must send HMRC the form P35 and P14s summarising the total payroll figures for the year.PROCEDURES WHEN TAXPAYER CHANGES JOBWhen star employee left their old job, a form P45-Details of employee leaving work should be given to him by his previous employer. Information for Part 1 and 2 must be completed. If the employees last day of work falls on 6th December 2010, this form should reflect the National Insurance number, tax code and total wages and tax as of 6th December 2010. This form P45 will be then given to the novel employer when the employee joined onboard. Information for Part 3 will then be complete.The employee will be able to claim back the tax if he started the new job within four weeks afterward leaving the old job. This tax refunded will be made two to three weeks later if the employees wages is paid on a weekly basis, or included in the pay-slip if his wages is paid on a monthly basisIn the event if no form P45 is given to the new emp loyer, employee will need to complete the form P46-PAYE notice of new employee. HMRC will process the form P46 and revise the tax code if necessary. If too much tax is paid, employer will make the necessary refund.Form P46 is only necessary if employee is not a student whom works solely during their school holiday and employee is not working for one week or less. If archetypical pay-day falls on the 1st January 2011, form P46 information must be provided by employee before his first pay-day and employer must send in the form (both form P45 or P46) not later than the employees first pay day, which is 1st January 2011.Although send in forms can buoy be done online or paper form, it had been becoming compulsory for all employers to file the in-year forms online. In-year forms include form P45 and P46. Companies with more than 50 employees should already be filing their in-year forms online. They will be penalization if they file form P45 or P46 on papers. Companies with less than 50 employees are required to file their in-year forms online with effect from 6th April 2011.In the event If the employee decided to fork up or stop working, he can claim back the tax payable from HMRC, by completing form P50-Claiming tax back when you have stop working.COMPARE AND CONTRAST OF PAYE SYSTEM AND SELF-ASSESSMENT SYSTEMIn the view of HMRC and a taxpayer, both PAYE system and self- estimation system works about the same as both systems are meant to use to identify employees and freelance individuals incomes or pension in each tax year.Most employees in UK paid their tax due on their income or pensions to HMRC through PAYE system. except, employees like company director, even if they are already taxed through PAYE system, they will still required by law to complete a tax hand over. Employees whom earned proceeds from sales of certain assets (capital gain) will either need to inform employers so that they can include this income under PAYE system or they can complete a t ax return. Beside the company director, self-employed individuals or trustee or individuals having unknown income will also be required to complete a tax return and inform HMRC about their incomes or profits.Both employers and self-employed individuals have to first register under HMRC before any tax forbearance or tax payments. Employers have to register under HMRCs PAYE online for employers service, while all self-employed individuals must register for self-assessment and obtain the tax return form. Self Assessment tax returns will be send out by HMRC in April each year (which is April 2011 for Tax Year 2010-11), for online filing, a letter called Notice to File will send instead. A Self Assessment registration form is need to be complete if individual has never file a tax return before.Although the PAYE system and self-assessment system operate in the similar way, the typeface of forms used under these two systems are different. Under PAYE system, employers are expected to sen d HMRC the form P35 and P14s summarising the total payroll figures for the employee for the year. Under the self-assessment system, different forms are being used. Being self-employed, individual has to complete form CWF1 to register and inform HMRC about their business nature. Being not self-employed, individual has to complete SA1 instead.The deadline for tax submission and payment for both systems are also difference. Under PAYE system, Under PAYE system, employers are to pay HMRC on a monthly basis, by 19th of each month or by the 22nd if payment is made through electronic, if tax amount is more than 1,500. If tax amount is less than 1,500, employers can pay HMRC on a quarterly instead of monthly basis. Under self-assessment system, for paper tax return, it must reach HMRC by midnight of 31st October. For online tax return must reach HMRC by midnight of 31st January. For example, tax year 2010-11, paper tax return deadline is 31st October 2010 and online filing is 31st January 2 011.In term of tax payment, for tax year 2010-11, first payment falls on 31st January 2011, second payment falls on 31st July 2011, and the balance payments falls on 31st January 2012. Penalty will be charged if tax return is not received on time. Comparing the PAYE system with self-assessment system, tax payments for self-assessment are split into 3 payments, while under PAYE system payments are made either on monthly basis or quarterly basis.ADVANTAGES AND DISADVANTAGES OF PAYE SYSTEM AND SELF-ASSESSMENT SYSTEMNo system is prefect, to a taxpayer or HMRC, PAYE system and self-assessment system has its own advantages and losss.As a tax-payer under self assessment system, individuals benefit from the lower rate of NICs. Apart of this, under self-assessment system, self-employed individuals can enjoy the cash-flow advantage of not having paying their tax on a monthly basis as tax payments are split into three payments.However they will still face this split payment as disadvantage. T his is so when the deadline interpret reaches 31st January. Under self-assessment, individuals need pay taxes for two tax years on 31st January, first payment for tax year 2010-11 and balance payment for tax year 2009-10.As a tax collector, self-assessment system helps to collect tax for benefits. A taxpayer whom is an employee of a company, he may entitle to some benefits like company car etc. This benefit is not included in the pay-slip therefore not taxed through PAYE system. With self-assessment system, taxpayer will need to include this benefit-in-kind.Under PAYE system, when employee changes job, form P45 is supposed to be provided by previous employer to employee. When form P45 is not issue, new employer will need to complete form P46. Often when new employer do not received the code notice or form P45 on time, it is possible that tax calculation will be incorrect.Another disadvantage of PAYE system is that, under PAYE system, forms P9T or P9X will be given to employers to t ell them about the tax codes that to be use for each employee. However employee with more than one source of income tends to be confused of what tax code to be used. This will lead to incorrect deductions of tax for the taxpayer which resulted in either tax over-deducted or under-deducted. Also when a taxpayer turn from 65 or 75, he qualifies for age-related relief, tax code should change. For such cases, HMRC may or may not change the tax code automatically. If tax code is not change, taxpayer might ended up paying more tax.Based on the recent news released advance(prenominal) year of 2010, due to the new PAYE system, wrong tax code was issued, which caused taxpayer paying more tax. Due to this incident, HMRC is trying to improve the operation of PAYE system.