An Employer's 'QuickGuide' to Payroll
As an employer, you have numerous responsibilities, not only to the staff you employ, but also in accounting to HMRC for payments made to those employees.
1. The need to operate a payroll
The employment of staff in the UK ordinarily requires the operation of a payroll and the application of a system known as a Pay-As-You-Earn (PAYE) to tax your employees’ earnings (and certain benefits) and subject them to Employee’s National Insurance (NI) contributions and account for those deductions to the UK tax authority (H M Customs and Revenue) together with payroll taxes levied on the employer (Employer’s NI contributions). With very few exceptions, all earnings arising from work carried out in the UK must be subjected to PAYE.
Overseas employers are also obliged to operate UK payroll and PAYE where appropriate. If you are an overseas employer but have no UK place of business you are welcome to use our address for registration purposes.
We provide you with the necessary advice and support to set-up, operate and maintain your payroll.
The Inland Revenue must be notified at the outset and Employer’s PAYE and Accounts Office references obtained. We will advise you as to the information required to do so and make the application on your behalf. Registration is normally obtained within 7 –10 days.
You may choose to pay your employees monthly, 4-weekly, fortnightly or weekly. Payroll in any business is a priority – staff must be paid on time, every time, and be paid correctly. It is the responsibility of every employer to ensure that they are. We undertake that task for you.
2. Payroll & PAYE
The PAYE System
PAYE provides for income tax to be deducted from pay and aims to ensure that, as far as possible, the deductions of tax reflect the correct amounts due from the employee having regard to their circumstances as a private taxpayer.
The allowances and reliefs to which they may be entitled by reference to their personal circumstances are converted into a PAYE Code that is notified to the employer by way of a Notice of Coding. It is this PAYE Code that determines the sum of tax the employer must deduct. When registered as your agent for payroll we receive a copy of the notice directly.
The employer is provided with a set of tax tables to use with the PAYE code to calculate the tax due. The tables release the tax-free allowances over the course of the year, by reference to tax weeks or months as appropriate, to ensure the employee is taxed on a level basis throughout. Because the tables work on a cumulative basis throughout the year, the amount of the tax payable will reflect the earnings to date and, if the earnings fluctuate, the tax deducted will also fluctuate. On occasion a refund may arise.
The PAYE coding is a device to enable the employer to deduct the correct sum of tax while maintaining the employee’s privacy. The employer is not authorised to enquire into it - he merely has to operate the code. If an employee disputes the code or the tax being deducted he must take it up with his Tax Office directly.
An employee joining from other employment will usually bring with him a P45, an interim Certificate of Pay and Tax Deducted to date, from his previous employer, which also gives the PAYE Code number the new employer must use. If the employee does not have a P45 or it is their first employment, tax must be deducted at basic rate with no allowances until a form P46 is completed and a code obtained for them. When they leave the employer must in turn provide them with a P45.
National Insurance (NI)
In addition to tax, employees must pay Class 1 NI contributions on their earnings, known as Primary Contributions, and employers are obliged to pay a contribution known as a Secondary Contribution. The latter is in fact a payroll tax on the employer i.e. it is a cost to them. It is collected through the PAYE system together with the tax. The cost to the employer of any employee is therefore the gross wage paid plus the employer’s NI contribution.
In addition, employers must pay Class 1A NI contributions on certain benefits provided but which are not paid through the payroll (see Guide to Other Employment Compliance Issues).
3. Payroll filing & payment of PAYE
Payroll Year End
The Payroll year is the tax year to 5th April. Immediately following that year end, and subject to strict time limits and severe penalties, Annual Returns must be prepared and submitted summarising the operation of the payroll for the year and P60 Annual Certificates of Pay and Tax Deducted issued to all employees current at the tax year end.
Online Filing of year end returns and in-year forms
Online filing has become mandatory for all employers since 5th April 2010. In-year forms such as P45/P46’s (leavers & joiners) must now also be filed online. Our service undertakes all necessary filing for you.
Payment of PAYE
The sums of tax and employees’ NI deducted together with the employer’s NI contributions are paid over monthly (or quarterly within certain limits).
We send you out a payslip completed with the appropriate sums for you to pay over to the Inland Revenue. PAYE must be paid over by the 19th of the month following if paying by cheque and by 22nd April if paying electronically.
Penalties and Interest for late payment
With effect from 6th April 2010 penalties have been imposed for late payment. A percentage penalty is applied to the amount of PAYE not paid over on time. The rate is set by the number of times that the employer has been late and the length of time the payment is overdue.
There is no penalty for the first late payment in the year but thereafter the penalty is geared between one and four per cent. There is an a additional five percent penalty if an amount is outstanding for 6 months and a further five percent if the sum is not paid for 12 months.
In addition to penalties for late payment, interest at rates set by the Treasury may also be charged with effect from 5th April 2012. The distinction is that the former is a fine for non-compliance; the latter is restitution for interest lost.
Employer's Security Deposits
Employers with a history of serious non-compliance may be required to put up a security from which to meet unpaid PAYE liabilities in the event of default. The amount of the security demanded will be set by HMRC in the light of the potential tax liability i.e. the size of the payroll.
4. Minimum wage, holiday entitlements and statutory sick, maternity and paternity pay
These rates are set by the State from time-to-time and employers have a lawful obligation to pay no less. There are reduced rates for younger workers under the age of 21 and apprentices but schoolchildren have no such entitlement. If you engage staff on minimum rates we will keep you abreast of rate changes.
All employees, including part-timers, have entitlements fixed by law, presently to 5.6 weeks paid annual leave but capped at 28 days (equivalent to a 5-day week). It is calculated by reference to the employee’s usual working week. Bank and public holidays may be counted in the total if payment is made for them. Entitlement is earned by reference to the period of employment i.e. it accrues throughout and any balance due must be paid to the employee on leaving. It is usual for the employer to establish a holiday year for these purposes, either the calendar year or some other. The entitlement accrues throughout the period of employment, including through periods of sickness absence (can be problematic in a case of extended illness). While the employee has the right to paid holidays, the employer may direct when they may be taken.
Statutory Sick Pay (SSP), Maternity and Paternity Pay
These are Social Security benefits that are distributed through the payroll. The employer acts as the (unpaid) agent of the State in doing so (and may also bear all or part of the cost of the benefit). We attend to the compliance as part of our normal payroll service to you – there is no additional charge. But note that SSP is only a minimum entitlement – every employer is fully entitled to provide more generous sick pay benefits if it wishes.
5. Employment benefits
Benefits in Kind payable through the payroll
Where an employer reimburses a private liability of an employee, say for example a legal bill or a school fee, the employee is treated as being in receipt of (net) earnings equal to the sum involved. He becomes liable to income tax and employee’s NI on the benefit and the employer to the employer’s NI, as a result the (grossed-up) payment must be put through the payroll and PAYE operated (logically enough since the employee would otherwise have to meet his private liability from his or her net pay).
But if the company pays the bill directly to the supplier, payroll cannot be operated, in which case income tax must be accounted for through the P11D Benefits-in-Kind procedure and the Employer's and Employee's NI through the payroll (but without PAYE tax being deducted).
Finally, if the employer contracts directly with the supplier for the benefit to be provided to the employee, employee and employer contributions are not due, the benefit should not be subjected to PAYE but rather it should be returned through the P11D Return of Benefits-in-Kind mechanism that enables the employee to be taxed and the employer to be charged Class1A NI.
A failure to account for such items correctly is a common source of PAYE settlements following PAYE inspections.
Tips gathered and distributed by the employer are treated as earnings and must normally be subjected to PAYE through the payroll in the normal way. Failure to do so can result in a (very) expensive settlement for the employer.
Where the tips are kept separately by an employee on behalf of his fellows and distributed to them by him, a ‘tronc’ is said to be established with the employee being the ‘troncmaster’; who is then responsible for taxing the tips through a separate PAYE reference (although the Revenue may permit actual payment of the taxed tips to be made through the employer’s payroll for convenience). NI contributions are not due.
Very particular care must be taken by the employer and the troncmaster if problems are to be avoided.
While we hope this Quickguide has been useful please note that it is intended as a general guide only, may not reflect the latest changes in the law, and cannot be a substitute for proper professional advice. We cannot accept any responsibility for loss occasioned to or by any person, directly or indirectly, acting or refraining from acting as a result of material contained or not contained in this guide.