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Recrutiment & Employment Confederation

PAYE and NICs

PAYE (Pay As You Earn) is the system for the collection of income tax from workers and employees as they earn it. A recruitment business’s obligation to deduct tax and National Insurance from pay will depend on the individual’s employment status and whether s/he works through an intermediary. Separate rules apply to workers subject to the Construction Industry Scheme. 

1. Your own employees

All businesses must deduct the appropriate amounts of income tax from their employees’ pay and send these on a monthly basis to HM Revenue & Customs (HMRC). Similar rules apply to the collection of employee National Insurance Contributions (NICs).

2. Temporary workers (not working through limited companies)

Employment businesses supply temporary workers to end user clients. Temporary workers can be engaged on (1) “contracts for services” which means that they are not employees or (2) contracts of employment.

(1) Temporary workers on contracts for services - for tax purposes, if during the course of an assignment they are under the supervision, direction or control of the client, and do not work through an intermediary, the employment business is required to treat them as if they were employees for tax purposes (sections 44-47 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)). This means the employment business should deduct their tax at source. Similar rules apply under social security legislation and so it should also deduct employee NICs and pay employer NICs. Importantly, making these deductions will not by itself make these temporary workers employees of the business. Further information on employment status.

(2) If the employment business engages a temporary worker on a contract of employment, it should deduct tax and NICs as for any other employee.

PAYE is not a self-assessment tax. The worker does not bear responsibility for any failure to properly account to HMRC for income tax and NICs due on their income. Therefore if an employment business fails to deduct the proper PAYE income tax and NICs it will be the employment business, and not the individual, that will be liable to HMRC.

The employment business should issue a P45 when the relationship between it and the temporary worker ends, or after a certain period during which the business makes no payments to the temporary worker. This could be, for example, 3 weeks or longer.

3. Temporary workers working through intermediaries

If the employment business supplies a temporary worker who works through an intermediary such as  a personal services company, an umbrella company or  a CIS intermediary, it pays the limited company gross and the limited company should deduct the appropriate level of tax and NICs from the individual’s pay. The employment business should not be held liable by HMRC for any failure by the limited company to make those deductions. However, if the limited company is a “managed service company” under the MSC legislation it could be held liable under the “debt transfer provisions” – further information on the MSC legislation is available here.

Separately, if the individual works through a limited company incorporated overseas, if that limited company fails to make the appropriate deductions, HMRC can pursue either the end user i.e. your client, or the employment business for any unpaid sums. 

4. Real Time Information

This is a brief explanation of real time information – REC members should contact HMRC and/ or their software or payroll provider for further and more detailed information.

RTI stands for Real Time Information (RTI) which was introduced by HMRC in 2013 to improve how the PAYE system operates. It is also intended to support the Universal Credit system of paying certain welfare benefits. Under RTI, PAYE information must be collected on or before an employer* pays its workers rather than at the end of the tax year. So employers who pay weekly submit RTI on a weekly basis and employers who pay monthly submit RTI monthly on a monthly basis.

*As above, “employer” includes an employment business which pays its temporary workers under sections 44-47 ITEPA. Employment businesses which engage with limited companies (whether an individual’s personal service company or an umbrella company) do not make deductions on behalf of workers supplied by those limited companies. Instead, those limited companies make the relevant deductions – so employment businesses will not have to report RTI when paying an intermediary that is a limited company. Importantly, some umbrella companies call themselves “payroll providers”. It is essential that an employment business understands the difference between engaging with an umbrella company versus outsourcing its payroll calculations.