Payroll processing can sometimes be difficult to fully manage. Paying employees comes with several legal requirements, so it’s important to avoid making mistakes.
As an employer, it’s your responsibility to pay staff their contractual wages. You need to calculate employees' pay correctly and manage your payroll process effectively.
Failure to do so may result in significant consequences, like breaching contracts or paying monetary compensation.
In this guide, we'll discuss the payroll process, what it includes, and how to run it within your business.
What is payroll?
Payroll is a function which ensures employees are paid correctly.
It’s often managed by a company's accounting or human resources department. In the case of a small business, the owner or an associate may manage it personally.
What does a payroll process include?
It may seem that paying an employee is a straightforward process. But managing payroll processes involves a lot of work. The payroll admin of your company needs to:
- Manage details of new employees and update your payroll data.
- Calculate net pay and gross pay for all your personnel.
- Deduct the appropriate amount of income tax, national insurance contributions, student loan payments, and workplace pension scheme contributions.
- Foresee any statutory payments for each employee, such as maternity pay, paternity pay, or sick pay.
- Pay employees according to the agreed-upon dates, providing them with payslips.
- Issue PAYE forms in the time limit.
- Complete the HMRC's annual payroll reports.
- Maintain records of all payroll for a minimum of three years.
What are UK laws on payroll?
Payroll and employee compensation in the UK are regulated by several laws. These laws control the payment and the deductions which must be completed. For example:
- Employment Rights Act 1996: The fundamental rules governing all employers in the UK.
- National Minimum Wage Act 1998: The minimum wage in the UK is regulated and applied by this legislation.
- Part-time Workers Regulations 2000 and Agency Workers Regulations 2010: These two laws ensure these workers receive equal and fair treatment and pay.
- Income Tax (Earnings and Pension) Act 2003 and Income Tax Act 2007: These acts regulate paying personal and payroll taxes in the UK.
- National Insurance Contributions Act of 2015: This contains UK social security legislation as well as payments and penalties for businesses.
- Pensions Act 2008: Employers in the United Kingdom are required to establish and contribute to a pension fund for their employees unless they opt out.
- IR35 and contractor employment: These regulations must be followed for any company that hires freelancers or contractors.
What is PAYE?
PAYE is the method used by HM Revenue and Customs (HMRC) to collect income tax and national insurance from employment. As an employer, you should usually implement PAYE as part of your payroll.
Failure to operate PAYE will result in penalties from the HMRC. However, you don't need to register for PAYE under certain conditions related to your employees. These are:
- They don’t earn more than £123 per week.
- They receive benefits or expenses.
- They have another job.
- They make pension contributions.
PAYE reference number
Every employer who registers with HMRC receives an employer PAYE reference number. It's a unique mix of letters and digits that HMRC uses to identify your company.
You'll need the PAYE reference number for the following:
- Configuring your payroll software.
- Completing your year-end PAYE reports.
- Issuing employee payslips.
- Purchasing employer liability insurance.
- Adding your PAYE scheme to a service account for apprenticeships.
- Setting up a pension scheme.
- Contacting HMRC for PAYE matters.
Your staff members may request your PAYE reference number when submitting applications for services like universal credit and student loans. It's good to keep your reference number in hand and save any contact from HMRC.
Employers' annual payroll responsibilities
As an employer, you are required to fulfil the following annual payroll-related responsibilities:
- Before the tax year ends (5th of April), the final payroll report must be submitted to HMRC on or before your employee pay day.
- From April 6th forward, all payroll records for employees should be updated to reflect the right tax code for the new tax year.
- Make sure your payroll software is updated so that it's using the most recent national insurance and income tax rates.
- Produce and send P60 forms to each employee by May 31st at the latest.
- Report employee expenses and benefits by July 6th.
How to run payroll in your business
Setting up payroll appropriately is a top priority for any business.
If your payroll is not properly set up and handled, chances are that your workers will not be paid accurately. This can cause issues to your business since it can cause staff morale to suffer.
In order to avoid the issues raised, business owners must have effective payroll systems in place. This can be done either manually or by outsourcing to a payroll provider such as an accountant or a payroll bureau.
If you choose to conduct the payroll on your own, follow the steps below.
Register as an employer
Before you can start paying staff, you must first register with HMRC as an employer. You must do this before the first pay day, but no later than two months before the first payment is made to an employee.
Your PAYE reference number may take up to five working days to arrive. The PAYE reference number is required to enter HMRC's PAYE online system. It’ll allow you to:
- Check your payroll debt to HMRC.
- Pay bills.
- View your payment history.
- Access the employee tax codes and notices.
- Dispute a penalty.
- Get notifications from HMRC if you report or pay later than expected.
- Send HMRC your expenses and benefit returns.
Choose an online payroll software
Choosing the online payroll software that you want to use to process payroll is the next step into setting it up for your business. Using an online payroll software will make it easier for you to keep records, calculate pay and deductions, and send payroll information to HMRC.
HMRC offers a list of free payroll software suitable for all businesses. The only software that you should use is HMRC-approved software. This is because they verify payroll solutions follow their RTI reporting requirements. Doing this will help you save time and cut down on your admin time.
There is no best payroll software, but look for a payroll solution that enables you to perform the following tasks in just a few clicks:
- Create and access payslips.
- Keep track of pension deductions.
- Make pension payments.
- Pay employees on a variety of pay periods, such as hourly, weekly, or monthly.
- Send an Employer Payment Summary (EPS) if this applies to your business.
Add employees onto your payroll system
When you add a new employee to your payroll, you must notify HMRC. Even if they don't pay income tax. You should also add yourself as the company director on your payroll system.
You can add employees to your payroll system by submitting their details on a Full Payment Submission (FPS) the first time you pay them. The FPS should include the following:
- Employees' personal details including start of employment date.
- Employees' leaving date from previous job, the total pay and tax paid from previous job in the current tax year.
- Their student loan status, national insurance number and existing tax code.
- The amount of pay and deductions from their first pay after starting with your business.
Enter employee details in the payroll software
You will also need to add the employee's information into your payroll software and provide them with a unique payroll ID. You don't need to include the following people in your payroll:
Your payroll software calculates the necessary deductions based on each employee's tax code and national insurance number.
You’re required by law to provide all your workers with a payslip for each pay period. A pay period might be weekly, monthly, or any other time period agreed upon.
Payslips must have the following information at a minimum:
- Employee's gross pay (rate of hourly pay multiplied by hours worked).
- Deductions from salary (tax, national insurance, student loans, pension contributions, and any voluntary deductions).
- Net pay.
- Method of payment to the staff.
Report payroll to the HMRC
You must submit a payroll report to HMRC in an FPS after you have properly prepared your payroll to pay your staff. You can do so by using your payroll software to connect to the HMRC PAYE online system.
The FPS must be submitted prior to or on the same day that you pay your staff. If necessary, you can submit the FPS early, but you must mention the regular pay date.
If you submit your FPS late, you will be fined for each month that you're late. Companies with one to nine staff will face a £100 monthly penalty. This amount rises to £400 per month for companies with more than 250 workers.
Can you outsource payroll services?
Yes, you can decide to outsource services to a payroll processing company. Consider the following factors when selecting a payroll provider:
- Choose appropriate payroll services: You shouldn't be paying for payroll services that you don't need. Make sure the provider offers the appropriate level of service.
- Automate the simple tasks: Make sure your provider uses software and automates to avoid paying admin fees for simple tasks.
- Review employee data frequently: Find out from the provider what processes they are using to review and update personnel data.
- Ensure data security: Check out what security measures are in place to protect your data.
- Make the most of what you already have: Identify the key features of your payroll software. You might have software that handles the tasks and automatically submits data to HMRC or pension providers after your pay run.
- Choose providers that you know: Ask your bookkeeper or accountant whether they provide payroll services.
Get expert advice on payroll with Peninsula
Payroll administration involves several processes. Doing it wrong could have serious implications for both your company and your staff, like delayed tax reporting and lower staff morale.
Peninsula offers expert guidance on payroll advice. Our team offers 24/7 HR advice service which is available 365 days a year; with multi-lingual assistance and fully trained counsellors ready to help.
Want to find out more? Book a free consultation with one of our HR consultants. Call 0800 028 2420.