What do you need to know about Payroll?

Employers in the United Kingdom are lawfully accountable for implementing and concluding all tasks pertaining to an employee’s payroll. It is the discretion of an employer if he/she opts to operate payroll in-house, through a payroll software, or decides to contract out the payroll to a third-party payroll provider. Apart from paying the correct salary to the employees, an employer must make certain that the correct legal deductions are made before disbursement on an employee’s salary. These deductions such as pay-as-you-earn (PAYE) are required to be paid straight to the United Kingdom government. Majority of the companies in the United Kingdom process payroll by means of pay-as-you-earn (PAYE), a Her Majesty’s Revenue and Customs (HMRC) system to make Income Tax deductions and National Insurance (NI) from wage earner’s take-home pay.

What is PAYE?

Pay-as-you-earn (PAYE) is a structure used by HMRC to collect National Insurance Contributions (NICs) and Income Tax from a wage earner’s salary. An employer is not required to register for PAYE if not even a single employee is paid more than or equal to £118 per week. However, an employer must keep payroll records such as salary paid to an employee, employee leaves and non-attendance due to sickness etc. – these payroll records must be keep for 3 years after the end of the tax-year they pertain to. Payments made to a member of the staff encompasses an employee’s wages or salary, along with things similar to any bonus or tip, statutory maternity pay or statutory sick pay.

How does PAYE affect me, the employer?

It is the accountability of an employer to deduct National Insurance Contributions (NICs) and Income Tax, on behalf of the government/administration, from an employees’ salary. The same activity must be repeated for every single pay period, typically monthly, and pay this to HMRC. Tax months begin from the 6thof a month and ends at 5thof the next month.If an employee is paid more than the threshold, an employer will be required to pay Employer’s Class 1 National Insurance Contributions. At that time, an employer will be required to provide each employee with a pay slip which summaries all the pay-as-you-earn deductions. Every single time an employer pays his/her employees, use a payroll software to:
  • Maintain a record of each employee’s pay including their wages/take-home pay and any additional pay
  • Compute deductions such as National Insurance and tax from each employee’s pay
  • Compute each employee’s NIC that needs to be paid on earnings in excess of £166 for every week
  • Generate payslips for every single employee
  • Report the take-home pay and deductions to Her Majesty’s Revenue and Customs in a Full Payment Submission (FPS)
If an employee is paid less than £118 per week, an employer typically merely need to report and record their pay. Additionally, HMRC will send a late filing notification if an employee is paid but an employer does not send an FPS or sends a late FPS. HMRC can also charge a fine, except if an employer has an actual objective for reporting late. Furthermore, HMRC will close the PAYE arrangement if a new employer does not notify or pay HMRC within 120 days. Read More About PAYE Scheme

How do I know how much to deduct in tax and NICs?

An employer can seek information about an employee’s National Insurance number and tax code, when a new employee joins. Using these statistics, along with an employee’s earnings to date, an employer can compute the amount of NICs and Income Tax to be deducted. The amount of Income Tax an employer will subtract from an employee’s salary will be determined by the tax code and the amount of taxable income above the Personal Allowance.

How do I pay the tax and NIC deductions to HMRC?

Typically, an employer will be required to register with HMRC prior to making PAYE disbursements, employing staff or subcontracting construction work. If a business begins to employ people on or post 6 April, the employer pay-as-you-earn reference number will be received by 17 May. Payments can be made by cheque via post, however, HMRC strongly endorses that disbursements should be made by electronic means – this method is safer and can ensure when the payment is received. In order to pay a member of the staff,prior to receiving an employer pay-as-you-earn reference number, a business should store FPS, run payroll, and send a late FPS to HMRC.

How often do I need to run payroll?

An employer is required to send the latest pay deductions to Her Majesty’s Revenue and Customs as per the below mentioned guidelines:
  • Pay by electronic means until 22nd of every month
  • Pay by cheque via post until 19th of every month
In very few cases, an employer will be able to pay three-monthly or twelve-monthly but this needs to be verified judiciously.

What forms do I need for PAYE?

Numerous PAYE forms are needed – some pertaining to operating PAYE in the approved manner, while the others assist in notifying HMRC about an employee and their pay particulars. An employer must provide an employee with a P60 at the closure of each tax year, and P45 when they resign/stop working for an employer. There are 4 categories of forms:-
  • Employee forms
  1. Starter checklist for PAYE (gathering the correct information regarding a new employee if he/she does not have a latest P45)
  2. Expat starter checklist
  3. Application for informal treaty direction or section 690 (S690)
  • Expenses and benefits forms
  1. Expenses and benefits – reporting forms such as car provided to member of the staff for private use (P46(Car)); end-of-year expenses and benefits (online form); end-of-year expenses and benefits (P11D(b)); end-of-year expenses and benefits (P11D)
  2. Expenses and benefits – working sheets such as car and car fuel benefit (P11D WS2 and WS2b); living accommodation (P11D WS1); private use of company van (P11D WS3); mileage allowance payments not taxed at source (P11D WS6); relocation costs (P11D WS5); interest free and low interest loans (P11D WS4)
  • Tax year forms, for the beginning of a tax-year
  • Payroll administration forms
An employer is required to present these forms to HRMC at numerous stages all through the employee life cycle and business year. You can find out complete Paye Forms here - Paye Forms

How can I make this easier for myself by using Payroll Software?

An employer can make payroll activities simpler by using an effective payroll software such as Nomisma Solution, whereby, they can generate and file numerous payroll returns and forms online with HMRC. Also, a payroll software won’t let the business miss a payment or deadline.