Once your business gets to a level where you are starting to hire employees, it is critical that you master the art of payroll sooner rather than later. It doesn’t matter how wonderful your workplace environment is; if people aren’t getting paid they won’t be happy, and slipping up on your obligations to HMRC can land you in hot water as well.
What Is Payroll?
Although most people assume that payroll refers simply to the process of paying employees, there is much more to it than that. Nowadays the process typically includes:
- Calculating net and gross pay, National Insurance contributions (NICs) and SSP
- Calculating PAYE
- Deducting necessary amounts from the pay of individual employees, including income tax and NICs
- Paying employees
- Issuing payslips
- Submitting full records to HMRC on time
What Is PAYE?
PAYE, or Pay as You Earn, is the standard method most businesses will use to collect income tax and National Insurance from employees, and then pay this direct to HMRC. This means that employees will not need to keep track of the tax that they owe, fill out a self-assessment tax return and pay it in a lump sum, and also cuts down on the opportunity for tax evasion.
Most businesses that employ people will be required to use the PAYE system, once an employee is earning £116 per week or more. Even if you don’t have any employees who are earning above this threshold, you will still be required to keep full records to send to HMRC.
Getting Started With Payroll
Decide Whether You Want To Manage Payroll In-House
As a smaller business, chances are you will want to keep costs down and manage as many processes as possible in-house, but there are companies you can outsource to if you want to save yourself some time and energy. Keeping your payroll in-house gives you a bit more control and saves money, whilst hiring a bookkeeper or payroll company can help to limit the chance of mistakes being made.
Register With HMRC
Before you can actually start running payroll you need to register with HMRC to let them know that you are an employer. This will give you the log in details you need to use HMRC online services, as well as to use PAYE Online.
Choose Your Payroll Software
You will need to find payroll software that you feel comfortable using and will help to automate your payroll system as much as possible to protect against mistakes. Using payroll software you will be able to record the details of all of your employees, calculate their pay and salary deductions, and send records direct to HMRC.
HMRC themselves provide a basic software solution that is free to use, but as they say themselves “our Basic PAYE Tools have some limitations” and it is for this reason that most businesses go for one of the more polished (and comprehensive) commercial payroll packages.
Key Payroll Factors
Once you have your software up and running, there are a few key elements that you need to focus on and ensure that these are working well.
- Payslips. Every time you pay an employee you will need to produce a payslip. A copy of this will go to the employee and a copy will remain in your records. You will also need to produce p45s and p60s as and when needed.
- RTI. This stands for Real Time Information, which is an HMRC service that you use to report how much you are paying each employee, and when.
- Records. Your business needs to keep full and comprehensive records of everything that you pay to employees, HMRC and more, including tax codes, for a minimum of 3 years.
What You Should Pay Staff
This is somewhat up to you and the budget you have as a business. However, there are many factors which affect what you need to be paying your staff, taking into account:
- Minimum/living wage
- Employer’s National Insurance (paid by you)
- Employee’s National Insurance (paid out of your employee’s wages)
- Auto-enrolment pension contributions
- Industry average pay rates
You should decide early on when staff will get paid, be it weekly, 4 weekly or monthly, so that you can keep your payroll records correct from the earliest possible stage.
Using the Real Time Information service you will submit reports about what you are paying, to who, and when. This can be monthly but there will also be annual deadlines for other reports. You should be able to find out about these dates and deadlines from your accountant, as well as from your payroll software provider.
What Should Pay Slips Include?
Every employee that works for you must receive a pay slip for every time they are paid, according to the Employment Rights Act 1999 section 8. Under this legislation you are required to provide, on this payslip, details of:
- Gross pay
- Deductions (including tax, NICs, pensions etc)
- Net pay
- Method of payment (usually BACS)
Around 90% of all salaries are paid via bank transfer using BACS. You can agree the preferred method of payment with your employees, however, as other methods are available, including the Faster Payment Service and CHAPS.
Expenses need to be included on pay slips, and how these are treated depends on what type of expense they are. If you are reimbursing an employee for a business expense, this will not be treated as gross pay and is therefore not subject to tax and National Insurance. Personal expenses, however, must be taxed as gross pay before reaching the employee.
The auto-enrolment pension rules mean that you need to automatically enrol every employee that works for you into an approved pension scheme when they begin to work for you. Employees are able to opt out if they so choose, but it is your job to enrol them as a default.
You will be able to use your payroll system to help you to auto-enrol employees, as it will contain all of the information you need for the scheme, including personal and salary details.
Once you have got a payroll system set up it can take time to become comfortable with it, so it may still be a good idea to work with an accountant or other outside source who can help you to maintain compliance and offer you advice regarding deadlines and reporting. HMRC also offers a wide range of resources and advice on their website.
Our friendly and knowledgeable team at TFMC are here to help with your payroll, as well as with any other accountancy and taxation requirements you may have. To get in touch please call us on 0800 470 4820 or send us an email at firstname.lastname@example.org.