While payroll seems to be a subject that is complex and alien to many, it's not as difficult as you think. There are just some basic concepts that have to be understood to handle your company's payroll. It is important to take care when you are calculating employees monthly wages and deductions as research by Sage shows that 35% of UK workers would look for another job if they were paid incorrectly even once. Furthermore, over half of those paid incorrectly would lose trust and have feelings of resentment.
In this article, I'll discuss the different aspects of payroll that you need to know and why.
To be able to pay wages, you must set up as an employer with HMRC. You will have to obtain an employer PAYE reference number before your employee's first payday, and it can take up to 5 work days to receive the reference number.
There are two ways you can go about doing payroll for your business. One is to outsource this to an accountant or an external company specialising in payroll services, or you can do it using payroll software. A few familiar names you may have heard are Quickbooks, Xero and Sage. There are plenty more solutions provided on the government website for payroll packages that HMRC recognises.
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Calculate employees earnings
Earnings will include the employee's annual salary apportioned for the month and other payments, such as bonuses, holiday pay, and commission.
After calculating employees' monthly wages, you must deduct the relevant expenses. You need to be aware of the potential deductions, as there can be a few.
It is a legal requirement for you to offer a pension scheme as an employer. You must automatically enrol your employees in the pension scheme if they are over 22 and below the State Pension age and earn above £10,000 per annum. Employees can opt out of the scheme.
You must pay a percentage of employees' earnings into a pension scheme. The minimum amount you must contribute to the pension scheme is 3% of the employee's earnings. The employee's minimum contribution is 5%.
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Student Finance loan repayments
Student Finance loan repayment will differ based on the plan and salary of the employee.
There are four different types of loan plans listed below. You can find this on your employee's P45 or by asking when they graduated.
- Plan 1 - started undergraduate course in the UK before 1 September 2012
- Plan 2 - started undergraduate course on or after 1 September 2012
- Plan 4 - started undergraduate or postgraduate course on or after 1 September 1998
- Postgraduate - took out a Postgraduate Master’s Loan on or after 1 August 2016
You won't need to calculate how much to repay. Your payroll software will do this for you.
You may provide your employees additional benefits such as cycle to work scheme, childcare vouchers, eye care vouchers, gym subscriptions and many more. Benefits in kind are anything that will benefit the employee personally and, therefore, must pay tax on the amount.
There are two ways to record benefits in kind:
You can record such benefits via the payroll, so your employee pays tax on the benefit they receive. To do this, you must register the taxable benefit with HMRC before the beginning of the tax year in which the benefit will be applied.
You will then calculate the cash equivalent value and add it to the employee's monthly salary. This way, the employee will pay tax on the benefit in kind under PAYE, and their tax code will be unaffected.
You can complete a P11D form after the tax year end to inform HMRC of the benefits received by employees. The employee's tax code will then be reduced, and they will pay tax via PAYE on the benefits received in the prior year.
You must complete the P11D form by the 6th of July following the end of the tax year. The employee's PAYE tax code will be amended to reflect the monetary value of the benefit they receive.
Regardless of which method you choose to proceed with, you will have to complete a P11D(b) form by 6 July following the end of the tax year to enable the Class 1A NIC. The rate is 15.05% for the tax year 2022/23.
For more details on the various benefits and expenses, as well as the corresponding tax treatment, you can check the HMRC resource.
Your employee may be liable to pay child maintenance. The child maintenance service will ask you to set up deductions of earning order (DEO), or you can get an attachment of earnings order (AEO) from the court to make such deductions. You must make child maintenance payments by the 19th following the month you made the deduction.
You may also receive an AEO from the court to make deductions if the employee is in debt or has fines and the court ordered this to be deducted from their wage.
PAYE & National Insurance Contributions
Your payroll software will calculate how much tax to deduct and send to HMRC and the net amount to your employee.
The deadline for paying HMRC is the 22nd of the following month, but it is advisable to do it sooner. You'll need your PAYE Accounts Office Reference number to pay HMRC.
An important thing to bear in mind is to keep all documentation related to your payroll calculations. The government website states that you must keep records from the accounting period they relate to for six years.
The opinions on this page are for general information purposes only and do not constitute legal or financial advice on which you should rely.