PAYE and NICs Liability Guide

What is PAYE and NICs liability and why do you need it?

PAYE refers to ‘Pay As You Earn’ and ‘NICs’ refers to ‘National Insurance contributions’. We require this because of a new measure introduced by the UK government, effective from 1 April 2021. Recently, there has been increased scrutiny into R&D claims by HMRC and this is one of the measures used to monitor R&D claims. Essentially, a PAYE and NICs cap has been introduced as a means to manage any potential exploitation of the R&D tax relief scheme.

How much is the PAYE and NICs cap?

The cap for a loss making SME will be £20,000, plus three times the company’s “relevant expenditure on workers”. Relevant expenditure on workers includes the total liabilities for PAYE and NICs for the company’s employees and directors (regardless of R&D involvement) as well as the PAYE and NICs of any connected EPWs or connected-party subcontracted R&D (to the appropriate R&D apportionment).

Will I be affected?

A company making a small claim of less than £20,000 will not be affected by the cap, as it falls under the £20,000 bracket.

If a company meets the following criteria, they will also be uncapped:

  • Employees are creating, preparing or actively managing intellectual property (IP).

  • The company’s expenditure on R&D work that uses subcontractors or externally provided workers provided by a related party is less than 15% of its overall R&D expenditure.

How do I find the PAYE reference?

To find the PAYE reference, you can check your HMRC tax dashboard. The PAYE reference should also be displayed on any letter from HMRC regarding PAYE.

How do I calculate the total for PAYE and NICs?

To calculate the PAYE and NICs total, you will need to check your payroll summary from your payroll software or alternatively, you can find this on your P32 document. To find the total, you will need to add up the figures from the tax, employer’s NI and employee’s NI sections. You do not need to add any other figures from the payroll.

Here is an example of a payslip where you would need to add the tax, employer’s NI and employee’s NI.

Here is an example of a payslip where you would need to add the tax, employer’s NI and employee’s NI:

If you’re unsure, it’s recommended that you add your accountant to this section to help you with this!

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