Payroll is one of the key areas to understand when you have employees. Whether you have a team of one part-time person or a team of twenty full-time employees, the importance of payroll remains the same. There are also various elements in payroll services to understand and put in place to ensure you comply with regulations and requirements. That’s where our ultimate guide can help.
Things to know before manage payroll in your company
By definition, payroll is any payment given to staff for their work and will be conducted on a set time frame – weekly, bi-weekly or monthly are the most common. Payroll will include the payment of bonuses, commissions, tips and any other benefits including holiday pay.
The first big thing that you need to know about to manage payroll in your company is PAYE or Pay As You Earn. This is the system created by HMRC that collects both income tax and national insurance contributions (NICs) from employees as they earn. This means they don’t face an annual tax or national insurance bill in the way that self-employed people do.
As an employer, you have a responsibility for deducting tax and NIC from wages before employees receive them and ensure this money is sent via the PAYE system. This only applies to employees earning above the different thresholds and there are different rates depending on how much they earn. So you either need to be aware of these and keep up to date on them or having a payroll specialist who does it for you.
Information to run payroll in your business
Another important thing to have in place before you start running payroll is the information required from your employees. This will include things like their national insurance number and bank details. You will also need to set up with HMRC so you can conduct the PAYE system and ensure that employee’s contributions are what is required.
You will want to have a clear process in place to handle when a new employee joins the company, when someone has a change of details and when someone leaves. You will also need to have processes in place for the end of the tax year to create annual reports that are required including for expenses and benefits.
Who handles payroll?
Finally, you want to decide who handles payroll and if this is their sole job, part of their job or if you want to outsource it entirely.
For many medium and large businesses, outsourcing payroll is the best option. That’s because it is often a part-time job at best and spending the money to have a payroll specialist in the business isn’t always cost effective. Therefore by outsourcing it, you can be certain you have a qualified specialist handling the whole process.
If you allocate the job to someone in the company, you want to be certain they can handle it and have the knowledge needed. This means hiring someone with some payroll experience or training and this might mean they aren’t a great fit for other roles in the company. Or it might mean training someone to handle payroll in addition to their other duties.
How do you set up payroll for the first time?
The first time you run payroll is always a little different because you need to make sure all your processes are in place and will work as required. So there is some work to do in the lead-up to starting the payroll and a few checks to make as the process takes place.
Register as an employer
If you haven’t already done this, you need to register with HMRC as an employer. This applies if you employ people in the business or use subcontractors for construction work. Even if you only employ yourself because you have a limited company, you need to ensure you are registered.
You need to register before the first payday and it normally takes around five working days to get your PAYE reference number. You cannot register more than two months ahead of starting as an employer.
Choosing payroll software
Once you are registered for PAYE with HMRC, you will want to ensure you have the right payroll software or systems in place. If you decide to run it yourself, HMRC says you need to have software that can do a minimum of the following:
- Record details of employees
- Calculate their pay and deductions
- Report information to HMRC
- Work out how much tax and NIC you need to make for each employee
- Calculate statutory pay such as sick or maternity pay
If you have less than 10 employees, there is free payroll software available from HMRC. If you opt for a paid product, make sure it is tested and recognised by HMRC – most of the big name software options are.
However, some will have limited on what you can do such as they won’t produce payslips or make pension payments. Or you may not be able to pay people over different periods. This is why a payroll specialist is often the better option and they will have their own dedicated payroll software.
Collect and retain records
Whether this is done through the payroll software or other means, there are certain records HMRC requires you to keep. These are retained for three years from the end of the relevant tax year so HMRC can check them if required. Examples of what must be retained include:
- Pay and deductions for employees
- Report of payments made to HMRC
- Details of employee leave and sickness pay
- Taxable expenses, benefits or Payroll Giving Scheme documents
Also, remember that data protection rules must be used when storing this information to ensure it is protected at all times.
Tell HMRC about your employees
The information you collected before you started payroll is often then needed to provide HMRC information about your employees. For instance, you will want their P45 so you can get their tax code to make sure tax and national insurance are collected at the right rate.
You can register your employees with HMRC using the Full Payment Submission (FPS). This involves providing the details they have provided and giving them a unique payroll ID within the business that shows their deductions and payments.
You are now ready to move on to the process of making that first payment for your employees.
On or before your employees’ payday you must
With all the relevant information in place, you are now ready to move on to the processes to follow just before the pay day and on the day itself. You can do some of these jobs on either the pay day or just before it, depending on what works best for your business.
There are five basic steps that HMRC require you to take on the pay day. These are:
- Record the amount of pay that you are giving to each employee including salary or wages and any other payments to be made
- Calculate any deductions that need to be made from their pay including tax and national insurance
- Calculate the national insurance contribution that the business needs to make for their earnings if they earn more than £166 a week
- Create a payslip to provide to the employee – this needs to be done before they get the pay
- Report the amount paid and the deduction to HMRC in a Full Payment Submission (FPS)
The only time you don’t need to go through this process is when an employee receives less than £118 a week – then you just have to record and report their pay. This might be different if they have more than one job or are receiving a pension.
Late reporting problems
It is very important to get that Full Payment Submission to HMRC on time. If you pay employees and don’t complete this, they will send you a late filing notice. They can also do this if you send the FPS later than you should. They have the ability to charge a penalty for late submissions too unless you have a valid reason.
Not only that but late submissions can also lead to problems for employees who work but also receive benefits such as Universal Credit.
Paying on a non-banking day
The other thing you need to factor into your payroll plans is what happens if the normal pay day falls on a non-banking day – a Saturday or Sunday or a Bank Holiday. Because employees need to be paid on time or before the date, it is important to create a process for what happens in these situations.
So for example, if you would normally pay employees on the 1st of the month but this falls on a Saturday, you will need to set up the system to pay them on the last working day before this – that would be the Friday. Another example is the Easter holiday weekend – this is effectively four days together where you can’t pay someone. Here you would need to pay on the Thursday before the holiday.
Once the payroll process is complete, it is very much a case of repeat each month. You will have processes in place to ensure that you record what hours staff work, overtime and other payment as well as tracking things like sick or maternity pay.
One area to look at is if there are any changes to an employee after payroll that will impact the next payroll and that you need to inform HMRC. There is a range of information that needs to be updated on the FPS so it is worth tracking this at any time to avoid missing information they will require.
Examples of the kind of employee information that HMRC requires to be updated include:
- Joining or leaving the company
- Taking a leave of absence
- Changing personal details such as their home address
- Starting, receiving or leaving a contracted out or workplace pension scheme
- Reaching state pension age
- Going on jury service
- Goes to work abroad
If you are outsourcing your payroll, you will need to let your payroll company know about these areas and others that impact things like tax and National Insurance. A big part of business payroll services is ensuring that staff information is up to date and HMRC are informed of relevant information within their time scales.
Preparing for Payroll Year End
The end of year tasks are a big part of business payroll and can come with hefty fines if they are mishandled or done at the wrong time. Preparing for them is something you should start doing from the first payroll so that when the times comes, you are prepared.
The financial year ends on 5th April and the new year starts on 6th April. There are a number of tasks that must be handled within certain time frames around the new financial year. The basic schedule of events are:
- Send the final payroll of the year – on or before the last employee’s payday before April 5th
- Update employee payroll records – from 6th April onwards
- Update payroll software – from 6th April onwards
- Provide employees with a P60 – by 31st May
- Report employee expenses and benefits – by 6th July
Sending the final payroll of the year
You need to send the final payroll of the year before 5th April via the Full Payment Submissions (FPS). When you do this, you should select that ‘yes’ it is the final submission for the year in the applicable box. If you forget to do this, you can send an Employer Payment Summary – this can also be used if you there is anyone who didn’t receive a payment in the final pay period but still needs to be documented.
The FPS needs to be sent before 20th April. You also have up until this date to correct any information for the tax year ending on April 5th. If you don’t have an Early Year Update (EYU) option in your payroll software, you can use the Basic PAYE Tools provided by HMRC.
Updating employee payroll records
For every employee who works for you on April 6th, you need to prepare a payroll record, check their tax code is accurate and add this to the payroll software. You need to include all employees who will receive pay from your business, no matter how much and anyone who has worked in the current tax year since 6th April, even if they have already left.
HMRC will send you either a P9T form for any employee who needs to have a new tax code. Or a P9X form with general changes for any of your employees who tax code ends with the letter ‘L’.
Update payroll software
If you outsource your payroll to a specialist, you don’t need to worry about this. but if you do it in-house, then you need to download and install Basic PAYE Tools after April 6th each year. The HMRC website will tell you what the current version is at any time to make sure you are up to date. For example, at the time of writing the current version is 14.2.14330.88.
Provide employees with a P60
Everyone who works for you at the end of the tax year on April 5th must be provided with a P60. This summarises the total pay they have received and what has been deducted from it. This needs to be given to them before May 31st.
Payroll software can automatically create a P60 but if yours doesn’t, then you can order copies from HMRC and provide them to staff.
Report employees pay and benefits
The final step at the end of year process is to report pay, expenses and benefits for employees for the tax year. You will also need to pay any Class 1A national insurance that is due on expenses and benefits that the business has provided. These payments need to be received by either July 19th if paid by post or just July 22nd if you are sending by electronic payment.
Most Common mistakes in payroll
When you run payroll, there are lots of elements to bring together to ensure the system works smoothly – but mistakes can happen. These can have a big impact on the business including penalties from HMRC, breach of compliance issues and problems created for staff. Here are some of the most common payroll mistakes that companies make to watch for and aim to avoid.
1. Missing deadlines
Among the most common mistake made by business payrolls is missing deadlines that are set by HMRC – and these can land the company with a penalty. There are lots of deadlines as discussed above ranging from the monthly pay to the end of year deadlines. Having a clear picture of what needs to be done by when is very important to ensure you don’t miss any of these deadlines and encounter a financial penalty.
2. Misclassifying employees
As people work in more different ways than ever, it is easy to misclassify employees on payroll and end up reporting incorrect information. Examples of types of employees that are treated differently include temporary workers, freelancers and contract workers. You need to have everyone correctly identified on the payroll to ensure HMRC understands their position within the company.
3. Overreliance on software
Payroll software is sophisticated and complex, but it is just a tool and by relying on it completely and assuming it is correct, you can leave yourself open to problems. The primary issue with software is that it is only accurate if the information input into it is accurate – data entry problems are a common cause of issues.
While you should rely on software to make payroll accurate, you should also double check the information going in to ensure it is accurate. This is less of a worry if you outsource the payroll as the experts will have processes to check and re-confirm data. But if you are handling it in-house, checking data, ensuring accuracy and that changes are reflected are important steps to running a smooth payroll.
4. Not keeping records for the right time
As your business matures and reaches two, three or four years old, you will start to accumulate paperwork from past year’s payroll. However, it is important to remember that these need to be kept for at least three years according to HMRC. So while it might be tempting to have a clear out of old paperwork, it is important not to clear out anything HMRC might later request. Off-site storage can be a good solution to this problem if space is an issue.
5. Non-compliance issues
Perhaps the hardest part of running payroll is keeping on top of all of the changes in process and requirements that are involved. If you don’t, you risk running into non-compliance issues and there are those financial penalties waiting around the corner again. If you are going to be the one running the payroll, it is important that you keep on top of everything and make sure you are up to date with any changes.
If you do use a professional payroll provider, you don’t need to worry about this as they will handle it for you.
6. Not being routine about payroll
The final common mistake people make it not being routine about payroll. It is important that you do all of the required tasks at the same time every month to ensure that staff are paid on time and HMRC receives the information they need on time. It is isn’t a job to put off until next week when the process needs to start tomorrow.
Managing your payroll
There’s no doubt that payroll is a complex area which becomes even more complicated as the size of the business grows. Getting the right processes and software in place from the start is crucial to ensuring you do everything on time and avoiding common mistakes can save your business money.
Above all, consider using a payroll specialist as this can ensure you are not constantly dealing with the complexities of payroll and can focus attention on other parts of your business.
For help from a professional, get in touch with Trace Payroll. We are a payroll provider based in London. Find out more below, or fill out a contact form today.