All businesses that pay or will be paying staff in the future need to operate a payroll system. Here are the facts you need to know about setting up and operating payroll.
Payroll is the payments a business makes to staff (including directors) during a week or month. As well as salaries and wages, payments to staff may include:
There may be additional payments for:
PAYE (Pay As You Earn) is the HMRC (HM Revenue and Customs) system which is used by businesses to report information about staff and to collect both income tax and national insurance from employment.
Most businesses will need to register as an employer under PAYE when they start to pay staff.
To find out if you are required to register take a look at the questions below.
If yes has been selected for any of the five questions listed above you must register for PAYE.
You will also need to register for payroll online to report information about staff to HMRC at https://www.gov.uk/paye-online-log-in
When a new employee joins a business the following information will be required and must be reported to HMRC:
|Information||Detail||Where can I get the information?|
|1. Personal details||Name, address, gender, date of birth||P45 or starter checklist|
|2. National insurance number||A unique number issued to all UK residenrs over the age of 16||P45 or starter checklist|
|3. Start date||The date this employment started||Offer letter or contract of employment|
|4. Tax code||This determines the amount of income tax which needs to be deducted from the employee (the standard code with one job (or pension) for 2016/17 is 1080L)||P45 or starter checklist (*) or PAYE coding notice (P9T) issued by HMRC|
|5. National insurance category||This determines the amount of national insurance which needs to be deducted from the employee and any amounts payable by the employer (the most common being A (under state pension age) and M (under 21)||For a list of national insurance categories click here|
|6. Student loan||Any amounts outstanding before the last 6 April from a course of UK higher education||P45 or starter checklist or Student Loan Start Notice (SL1) issued by HMRC|
|7. Normal weekly hours worked||You will need to select from the following: less than 16, 16 to 24, 24 to 30, 30 or more, other||Offer letter or contract of employment|
|8. Payment||How frequently the employee will be paid: weekly, two weekly, four weekly, monthly, quarterly, biannual, annual||Offer letter of contract of employment|
If the employee has previously been employed a form called a P45 will have been issued by the previous employer. For employees without a P45 the starter checklist can be used.
* Within the starter checklist the employee must select one of the following statements:
Your payroll software or provider will tell you the tax code to use based on the statement which has been selected.
The amount that a business decides to pay its employees and the amount that the employee actually receives will usually be different.
Gross pay is the total amount an employee has earned for a pay period. The amount of gross pay an employee will receive will depend on several factors.Find out more
Deductions are any amounts which are taken from an employee’s gross pay before the employee receives it.Find out more
Net pay is the difference between gross pay and deductions and is the amount which is paid to the employee.Find out more
In order to calculate payroll deductions you must decide whether you are going to operate the payroll system yourself or appoint someone to do it for you. A payroll bureau or accountancy firm can operate your payroll system for you at a cost.
There are advantages of asking your accountant to manage your payroll. The additional cost is likely to be low and it’s a real time saver each month.
If you choose to run your own payroll system you will need to decide which software to install:
Your payroll provider or software will be able to calculate the statutory deductions (income tax and national insurance contributions) you need to deduct from your employees.
The GOV.UK website also provides calculators and tax tables should you want to manually check your payroll calculations.
How does PAYE work for employers? Watch the video below to find out more on how PAYE is accrued and paid. The video also demonstrates the concept of an employee’s personal allowance and tax code.
You normally need to register as an employer with HMRC when you start employing staff, or using subcontractors for construction work.Read more
Each time you pay employees or their circumstances change you need to submit the PAYE (Pay as You Earn) information to HMRC (Her Majesty’s Revenue and Customs). This information is submitted in real time and the system is referred to as RTI (Real Time Information).Read more
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