Payroll guide for employers

The Pay As You Earn (PAYE) scheme is used by HM Revenue and Customs to collect income tax and national insurance from employees, which is then used to fund essential services such as healthcare and education.

As a business you are legally obliged to deduct tax and national insurance from your employees and pay it to HMRC.

To support businesses who want to manage their own payroll our guide for employers gives an overview of how PAYE tax and national insurance deductions function to help identify any mistakes when producing their employees’ payslips.

What is PAYE for employers?

As an employer you will have to use the Pay As You Earn (PAYE) system. This enables direct tax and NICs collection that goes straight to HMRC.

In addition to tax and national insurance deductions other payroll responsiblities include management of student loan payments, pension deductions and correctly operating HMRC issued tax codes.

What is RTI?

This stands for ‘Real Time Information’ and is a major change in the PAYE system. It is intended to make the PAYE process more efficient because HMRC receives information every time you pay an employee, not just at the ‘Payroll Year End’.

The PAYE calculations remain the same; it is designed to simply be a more frequent delivery of information.

All businesses, regardless of size, are now required to use RTI for every employee payment. There are financial penalties if you are not RTI compliant or if you miss the deadlines.

Auto Enrolment

Auto enrolement is a government requirement for all employers to administer a workplace pension to all “eligible jobholders”. It is a crucial factor in setting up your payroll procedures, even though it is being rolled out over a six year period.

For maximum efficiency, you need a payroll provider that enables workforce assessment, automatic enrolment, payments into the pension scheme and communication with HMRC.

If it is organised with that in mind now, then you should avoid any glitches as you implement the scheme in your business in the future.

The two most important factors to consider are the definition of “eligible jobholders” and the deadline you are working towards.

An eligible jobholder is someone who usually works in the UK, is between 22 and state pension age and is earning more than £10,000 per year.

What is included as ‘payments’ to my staff?

Payments include statutory maternity or sick pay, tips, bonuses and – of course- salary.

What about deductions?

National Insurance contributions and income tax are deducted from your employees’ payments using the PAYE system. You may also have to monitor pension contributions and repayments for student loans as part of their deductions.

What do I have to report to HMRC?

As an employer you are responsible for reporting your employees’ payments and deductions before or on each payday. The PAYE payroll software you will need to use calculates the amount of tax and NICs you then owe.

There is also another report to submit which is for you to claim any reductions on your bill.

When do I pay HMRC?

Most substantially sized businesses pay monthly, although if you are only paying up to £1,500 every month you can arrange to pay quarterly.

How exactly do I operate a payroll system?

You have two options; do it yourself or hire a ‘payroll provider’.

Payroll Providers

It is crucial that you understand that the legal responsibility still rests with you, even if you hire another party to administer your payroll. These providers are usually accountants and you need to furnish them with all the employee details they need to efficiently run your payroll system.

Running Payroll Yourself

You need to allow time to complete a series of unavoidable tasks before your payroll will be up and running. You must first register as an employer with HMRC and get a PAYE login for your online submissions.

Then you need to select payroll software that will record employee details, calculate payments and deductions and report to HMRC.

You must collect and keep all of the records necessary and tell HMRC who you are employing. You are responsible for reporting all the required information to HMRC on or before your first actual payday. Then you get to pay the tax and NICs that you owe!

All of this reporting is done through HMRC’s online service. You are only exempt from this for very particular reasons; being disabled or elderly, unable to access the internet, if you receive support or core services for yourself or a family member or if you cannot use a computer for religious reasons.

Payroll Record Keeping

Your payroll records must be absolutely impeccable and record every detail for every employee. They are the evidence that your reports to HMRC are correct.

You must adhere to all Data Protection legislation in respect to your employees’ record and keep them for three years after the tax year finishes. HMRC can request access to your records for this time period.

You are obliged to keep records for:

  • Employees’ payments and deductions.
  • Reports and payments made to HMRC.
  • Tax code notices.
  • Taxable benefits and business expenses.
  • Absences due to sickness and holiday pay.
  • Payroll Giving Scheme documents.

Warning – you can be fined £3,000 for not keeping accurate payroll records and HMRC are allowed to estimate how much you owe them if you have insufficient evidence.

You must inform HMRC immediately if your records are destroyed, stolen or lost and make a reasonable attempt to recreate them.

Should I use a Payroll Accountant?

Outsourcing payroll services can be advantageous in several ways. The cost of training staff and purchasing software are substantial, not to mention the time it takes to train them.

By hiring a payroll accountant you can avoid all of these issues knowing that your payroll is being ran in the most efficient and cost effective way.

A company that specialises in payroll is likely to have more expertise in dealing with complex payroll queries which helps solve problems quickly and accurately keeping your payroll HMRC compliant. This minimizes the possibility of costly penalties from HMRC due to inaccuracies.

It’s worth noting that a significant number of businesses, approximately 61%, outsource their payroll, indicating that outsourcing is preferred over in-house payroll management by many companies.

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