Payroll

17 December 2020

It’s your responsibility as an employer to pay your staff the correct amount on the date agreed in their contract of employment.

Failure to do so can have serious repercussions for employers in the form of fines from HMRC, not to mention a breach of the employment contract.

Therefore, it’s important to have an efficient payroll process.

In this guide, we’ll cover the complete payroll process, PAYE deductions and when you need to complete each step.

What is payroll?

Payroll is the function within a business responsible for making sure all employees are paid correctly.

The payroll function is responsible for the calculation, payment, reporting, and record keeping. And should ensure that it’s compliant with payroll legislation to avoid action from HMRC.

What is payroll tax?

Employers normally must operate PAYE as part of the UK payroll process.

PAYE is the system by which an employer reports and pays tax and national insurance contributions due on their employee’s wages to the HMRC.

You will need to operate PAYE if you pay any of your employees over £120 per week, pay expenses, offer benefits, or employ someone with a second job or pension.

Failure to operate PAYE will result in penalties from the HMRC.

The payroll process

The payroll process is extensive, and it would be advisable for a business to ensure there’s a documented process or payroll manual in place to ensure the steps involved are completed.

Failure to follow the steps in an employee payroll processing period can lead to underpayments and inaccuracies in reporting data to HMRC. This section will give a general overview of what is involved in payroll processing.

New Starter Processing

When employing someone new it’s important to ensure they have been added to your system with the correct details.

HMRC requires;

  • Date of birth.
  • Address.
  • NI number.

Inaccuracies at the start of someone’s employment can lead to inaccurate reporting to HMRC.

One of the main parts of new starter processing is the new employee’s P45, which will detail their tax code (as per the end of their last employment) along with the tax paid and taxable pay year-to-date figures.

If they don’t have a P45, an employee should complete a new starter checklist which will detail their tax status. Failure to obtain either will lead to the employee being put on a ‘0T’ tax code.

The ‘0T’ coding means the employee will pay tax on all the taxable pay they receive, which could result in the employee receiving less than anticipated on their first pay day.

Calculate employee earnings

The amount an employee should be paid will be driven by the rates prescribed in the contract of employment. Generally, this will take the form of an annual salary to be paid in twelfths or alternatively an hourly rate to be paid in respect of the hours of working time.

As an employer, one of the main compliance checks that should take place when checking payroll calculations is that of the National Minimum Wage (NMW).

The NMW is the minimum rate of pay an employee must receive per hour for the time spent working. Failure to pay at least the NMW will result in huge penalties and potentially being named and shamed by HMRC.

Tax and National Insurance

Employees will be liable to pay tax and, depending on their age, National Insurance (NIC).

The amount of tax an employee will pay is dictated by their earnings against their personal allowance given by the tax code.

NICs are based upon their earnings against the NIC thresholds. NIC begins to be deducted on earnings over the Primary Threshold.

The amount of personal allowance and NIC thresholds are prescribed by the treasury each year in the Budget.

Much like the employee’s NIC, the employer will pay NIC on earnings over a prescribed threshold known as the Secondary Threshold. This amount is known as secondary NIC contributions. The rates and thresholds for tax and NIC can be found here.

Payslips

The right to an itemised payslip is given by section 8 of the Employment Rights Act 1996. The payslip should be itemised to reflect:

  • The amount of gross pay received.
  • The deductions incurred and the reasons for them.
  • The net amount to be paid.

You should also include the employee’s payroll number on the payslip.

A payslip should be received no later than the date the payment is made.  From April 2019, the legislation for payslips was amended to dictate that the payslip should also reflect the hours and pay rate for variably paid workers.

Some employers include additional information on the payslips. Including:

  • The employee’s National Insurance number.
  • The employer’s tax code.
  • The total that the employee has been paid in the current financial year.
  • Their payroll number.

What is a payroll number?

A payroll number is a code that allows the payroll department to distinguish each employee.

Having a payroll number on the payslip isn’t necessary but can speed up the process if employees have a question about their earnings.

Workplace Pensions

In 2008, the government introduced legislation (The Pensions Act 2008) that effectively dictates that employers must offer a workplace pension to its employees.

Known as automatic enrolment, an employer must enrol eligible employees into a qualifying pension scheme.

A common misconception of workplace pensions is that an employer does not need to offer a pension if the employee(s) are not eligible – this is incorrect.

There are a variety of employee categories within workplace pension rules but generally an employer must at least offer or make aware to an employee the option of joining a pension scheme.

You should seek the advice of a pension provider to discuss the implications of workplace pensions or visit the Pension Regulator website for guidance.

Reporting To HMRC

Each time an employee is paid, a report must be sent to HMRC to inform them of the payment on or before the date the payment is made. This is called Real Time Information (RTI) and the report is referred to as a Full Payment Submission (FPS).

You must send the FPS on or before your employees’ payday, even if you pay HMRC quarterly instead of monthly.

Your FPS should include a wide variety of information relating to:

  • The employer.
  • The employee.
  • Pay.
  • Deductions.
  • National Insurance information.

Find details of what is included here.

Other reporting requirements for payroll include but not limited to: Employer Payment Submissions (EPS), P60, P45, P11d.

Expert support on payroll with Peninsula

There are a lot of steps to running payroll and getting it wrong could have dire effects for your employees and your business.

With no room for error, it is vital that you get it right the first time. That is why we offer payroll advice to all our clients.

Speak to our expert team for advice on PAYE deductions, calculating holiday pay and working out the correct tax codes. And if you are not yet a client, you can still enjoy a free advice call from one of our business experts. Simply call us on 0800 028 2420.

Suggested Resources