Payroll is a crucial part of your operations. The Government requires you to account for and collect tax and National Insurance (NI) and report it online under the 'Real Time Information' (RTI) PAYE system. There are penalties for failure, missed deadlines and inaccurate data.
The many complications include processing statutory pay, pension contributions and personal details such as loans and student loans. But few employees will tolerate being paid late or incorrectly.
1. The rules
At its simplest, payroll calculates and produces payslips.
You must register as an employer with HM Revenue & Customs (HMRC)
- You do this if you take on an employee and their earnings meet certain thresholds, you provide them with employee benefits or they have another job or a pension.
- Registration can take two weeks and you must be registered before the first payday.
- You will need your name, business name and address, telephone number, email address, date of first payday. Other business information may be required.
- HMRC will issue you with a PAYE reference and Accounts Office reference as well as a guide on creating a payroll and operating tax and NI for the first time.
You must keep basic payroll information for each employee
- Make sure you check the employment status of anyone who works from you. All employees, and office holders such as company directors, must be paid through PAYE.
- Make sure your employee details are accurate. You will need as a minimum full name, home address, date of birth, NI number (shown on the employee's NI card or P45) and gender for each employee.
- The employee's P45 will indicate the employee's tax code and details of pay-to-date and tax-to-date from previous employment. If the employee does not have a P45 you ask them to complete the HMRC starter checklist.
You report payroll to HMRC each time you pay employees at the time you pay them
- You will need details of gross pay, PAYE and NICs deducted, statutory pay (maternity, paternity, adoption, shared parental pay and statutory sick pay), pay dates and start and leave dates (if applicable).
- You need this information for all staff, regardless of how much they earn or how often you pay them.
- This information must be reported to HMRC in your Full Payment Submission (FPS) each time you pay your employees.
Keep a list of all wage payments
- Use form P11 or the software equivalent prepared automatically by the payroll system.
- A P11 is a working sheet to help you calculate the tax due from each employee and the amounts of NI to be paid by the employee and the employer.
- These are based on gross pay including basic pay, bonuses, commission, overtime, statutory pay (maternity, paternity, adoption and sick pay) and any other taxable pay the employee is entitled to.
There may be additional deductions from your employees' pay
You cannot generally make deductions from an employee's wages unless they are legally allowed or you have obtained prior written consent from the employee. Deductions can include:
- contributions to occupational or stakeholder pension schemes;
- holiday pay schemes;
- student loan repayments;
- union subscriptions;
- loan repayments;
- attachment of earnings orders;
- corrections to previous payslips.
You need to deal with starters and leavers
- Issue a P45 to leavers - this states gross pay and taxes paid to date.
- Inform HMRC of starters and leavers in your FPS whenever you pay employees. You no longer need to send the P45 to HMRC.
2. Setting up a payroll
When setting up or upgrading your payroll, start by establishing your requirements.
When will your employees be paid?
- It is easier to pay employees monthly but some may need to be paid weekly
- Most employees are paid in arrears, towards the end of the pay period.
How many employees do you have?
- The number of employees you have determines how long it will take you to prepare a payroll.
What payment method should you use?
- Direct credit through your bank is both inexpensive and reliable.
- Cheques are simpler for a smaller payroll but can be time-consuming.
- If you use BACS, your software may need to generate a hash tag for the RTI submission.
- Avoid making cash payments and ensure all employees have bank accounts.
- Paying with cash involves additional work, poses a security risk and increases your bank charges.
You need various pay policies
- You should have a policy regarding additional payments such as travel and mileage claims. You should also have policies on maternity, paternity, adoption, shared parental and sick pay.
- Decide who will notify the payroll department of these payments, whether you will make payments above the statutory minimum and what discretion you are prepared to exercise.
Establish a notification procedure
- Put somebody in charge of telling the payroll function when people join or leave the company.
- Most employers require an employee's immediate supervisor to notify the payroll department of any sick pay, maternity pay, paternity pay, adoption pay, shared parental pay, overtime, commissions, bonuses and unauthorised absences.
- Set deadlines for overtime and expenses claims. Missed deadlines should mean that any extra payments owed are paid next time.
You can be fined for overlooking taxable benefits
- Some benefits are taxed as an addition to gross pay. Most benefits must now be reported via the payroll (referred to as "payrolling") which removes the requirement for annual P11D returns.
- The payroll function needs to know the appropriate treatment for different benefits and the cash equivalent. For example there are special rules regarding company cars and the provision of fuel.
- Form P9D has been abolished along with the £8,500 employee benefits threshold.
- You will have to come to a PAYE settlement agreement if you want to pay the taxes on the benefits that your employees receive.
- Some benefits are specifically exempt from tax. For example, you can spend up to £150-a-head per year (including VAT and related costs such as travel) on annual parties for all employees without being taxed on it.
Professional advisers can help you set up a payroll system
- Your system should be appropriate to the size and needs of your business.
- If you outsource your payroll, the provider can set it up for you.
- Your accountant can advise you on specific matters, such as managing statutory pay or directors' NI.
3. Operating payroll
Businesses may choose to operate payroll manually
- You can operate your payroll in-house or outsource payroll processing to a third party provider or your accountant. The decision depends on the amount of control you want and whether you have the resources to implement an in-house system.
- Whichever you choose, you remain responsible for the payroll and reporting of data to HMRC.
Payroll software provides greater control
- The software produces payslips automatically, calculates tax and NI deductions and statutory pay and allows you to capture valuable management information (see Using payroll information).
- As RTI is mandatory for almost all employers, most operate their payroll using RTI-compliant software (or outsource to a provider that uses compliant software). Compliant software helps you meet your obligations under RTI PAYE.
- The initial cost of implementing a computerised payroll can be slightly higher. The final cost depends on the number of employees and the level of integration you demand.
A payroll provider, bureau or accountant can offer a continuous service
- Even the smallest firms can outsource their payroll.
- You provide the pay data. The bureau produces the payslips, keeps the records and produces the weekly, monthly and annual returns due under RTI PAYE.
- Most providers or bureau charge per payslip plus an initial fee to set up the payroll. They may charge additional fees for any changes you wish to make.
The payroll department or provider will usually be responsible for meeting a number of important deadlines.
There are payment deadlines
- Tax and NI contributions payable must be received by HMRC by the 19th of each month. If you pay electronically, this is extended to the 22nd of each month. If you have more than 250 employees, you must pay electronically.
- Employers who collect less than £1,500 a month in PAYE, NI and student loan repayments may pay quarterly in January, April, July and October.
Certain information must be filed online whenever you pay your employees
- Full Payment Submission (FPS) - (sent every time you pay employees) including how much each employee has been paid, details of deductions made such as tax and NICs and any new starters or leavers in the pay period.
- Employer Payment Summary (EPS) - to report reductions in what you have to pay HMRC or that you haven't paid any employees in that pay period.
- Depending on the circumstances, you many need to submit other reports or requests to HMRC.
Employees working for you at the end of the tax year must be given certain documents
- Each employee must receive Form P60, detailing their total pay and tax and NI deductions by 31 May.
- Employees in receipt of workplace benefits must be given a statement of "payrolled" benefits, showing any taxable benefits received and their cash equivalents, by 6 July.
4. Using payroll information
A well run payroll system can provide you with a range of management information that can be helpful in the running of the business. Only gather the information you will use.
Payroll information can give you detailed, accurate data on employee costs
- For example, you can use data to calculate how much time employees spend on different projects, jobs or tasks. To do this, you will need a system for recording time.
- You can also find out how much you provide in benefits and what the total cost of employment is including employers' NI.
Payroll information can be used to keep track of individual employees
You can track costs and attendance records. Useful information to monitor includes:
- holidays taken and remaining;
- authorised and unauthorised absences;
- pension scheme costs;
- trade union membership.
Qualified payroll personnel can explain to employees what their payslips mean
- For example, they should be able to explain new deductions or changes in the rate of taxation.
Payroll reporting and payment deadlines have to be met whatever happens
- You need to make contingency plans if you operate an in-house system.
- It is recommended that you have at least two employees who can operate payroll, to cover for sickness and holidays. Alternatively, you may want to make arrangements for your accountant to provide emergency cover.
- Make a back-up copy, preferably stored in an off-site location, of all payroll information.
- Ideally, you should run payroll on a separate computer with its own printer to minimise interruptions and make payroll more secure.
Payroll information must always be kept confidential
- Data protection rules apply to payroll data and the employer has a clear duty to preserve employees' privacy.
- Establish who is allowed to access payroll information.
- Keep all payroll information in a safe place and back up regularly
- Use password systems to secure computer files.
- Print payslips separately and destroy any test runs.
Like any other system that pays out money, payroll is vulnerable to fraud
- Try to avoid having one person managing the whole payroll process from start to finish. It is often wise to have starters set up by another member of staff.
- Establish which employees are allowed to authorise payments.
- In addition, actual payments should be signed off by a director or direct supervisor.
- Check whether you need to register as an employer and register with HMRC.
- Use the HMRC starter checklist to collect information about a new employee without a P45 on GOV.UK.
- Use the employment status indicator (ESI) tool to determine if an individual works under a contract or service (employee) or contract for services (subcontractor/self employed).
- Find recognised payroll software or download HMRC's Basic PAYE Tools from GOV.UK.
- Find PAYE guidance on GOV.UK.
- Make a payroll enquiry about PAYE or the requirements of RTI reporting to HMRC (0300 200 3200).
- Find an ICAEW chartered accountant, an ACCA accountancy firm, an ICAS chartered accountant or a CIMA management accountant for advice on payroll, tax and NI.
- Find payroll training from the Chartered Institute of Payroll Professionals (0121 712 1000).
"An effective and efficient payroll system helps to make a business run smoothly. Your accountant can help deal with the intricacies that can and do arise with payroll. They can ensure the system runs smoothly to benefit your business and your employees." - Glenn Collins, The Association of Chartered Certified Accountants