Accounts and Legal’s Ollie Warne on why it’s important to keep on top of payroll right from the beginning, and some of the necessities you may not know about – but should do.
Every employer should get to grips with payroll. It’s a legal requirement to have a trackable payroll system recording all payments, provide HMRC with monthly (RTI – real time information) updates, and provide employees with itemised pay statements. Salaries tend to represent a large proportion of company costs, so managing payroll properly is central to managing your cashflow, which is central to the overall running of your business.
Many businesses leave payroll management to their accountants, or to payroll agencies. These are good options for many businesses, as it’s imperative to your relationship with your employees, and HMRC, to keep your payroll records in order and make sure everyone is paid the right amount on time. Mistakes can be corrected, but there are fines for late reporting, and if employees hate being paid late, they hate being told they’ve been underpaying tax, and it’s coming out of the next pay cheque, even more.
Employers’ National Insurance is set at 13.8 per cent on earnings over £155 per week (£8,060 per year). Auto enrolment pension contributions start at one per cent of annual salary and will rise to three per cent in 2018. What many employers forget or don’t realise is that while these obligations increase the monthly cost of each employee, they are a cost of running your business and will result in a reduction of your corporation tax bill.
If you are handling payroll yourself, on top of these rates, you must also understand income tax rates and brackets, employees’ National Insurance, student loan repayment rates, and employees’ auto enrolment contributions, so you can deduct these from their pay each month. This can seem overwhelming, but HMRC’s online system and a large range of payroll software options are out there to do the calculations for you.
Registering as an employer
An employer with any worker earning over £112 per week must register as an employer with HMRC, and must usually register online for PAYE. PAYE is HMRC’s Pay-As-You-Earn tax withholding system, which collects income tax, employees’ National Insurance, employers’ National Insurance, auto enrolment pension contributions, and any student loan repayments. The system helps you calculate all of these different obligations and deducts them automatically when a payment is made.
You are exempt from PAYE if none of your workers earn over £112 per week, so long as they don’t get expenses and benefits, have another job, or receive a pension. Registered or not, you must always keep meticulous payroll records, and registered employers must still report payments made to employees paid under the £112 per week threshold.
Pay – what counts?
Pay is made up of an employee’s regular salary, any bonuses or commission, holiday pay and any statutory payments, for instance paternity pay or sick pay. If you’re handling payroll yourself, you still need to issue regular pay statements, known as payslips. Payslips must show gross salary, any fixed or variable deductions with a statement of details, and net pay (after deductions). If you breakdown pay into separate payments, details of each payment must also be shown.
This is a lot of information, but really it’s just a handful of fixed-rate deductions you must take from your employees’ salaries, and a couple of fixed-rate contributions you must make to HMRC. If you do this correctly, you’ll have all the information needed for payslips to hand. It’s highly advisable to invest in some payroll software, and often cost-effective to hand the whole job over to your accountant or a payroll agency.
Ollie Warne is an accounts manager at small business accountancy firm Accounts and Legal.
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