With business comes the act of employing people. Employing people becomes inevitable as you can’t go on for long as a one-person army. There is going to be a point where you will need help. Therefore, it is essential that you master Payroll, given how vital it is for the business. You don’t want to displease your employees by getting Payroll wrong as it impacts productivity and maybe penalties from HMRC. Now you must be thinking that Payroll is just merely paying money to the employees. It is not that simple. Let’s first understand what Payroll is.
What is Payroll?
Now Payroll can generally mean several things. However, when it comes to employees, it merely means calculating their pays. There is a whole process involved. Which includes:
- Calculation of gross pay and net pay
- An estimate of National Insurance
- Calculation of PAYE
- Deducting tax and National Insurance from pay appropriately and other deductions
- Generating payslips and paying the employees
- Sending out all information to HMRC
Pay as You Earn, famously known as PAYE, is a system generated by HMRC for collection of Income Tax and National Insurance from all employees. Being a person who has people working under him via employment, you will have to make use of PAYE in the process of Payroll. There is a limit till which you don’t have to apply for PAYE. For instance, if any of your employees are not earning more than or equal to £116 per week, then you are not supposed to apply for PAYE. On the other hand, keep in mind that you are still required to keep payroll records.
Now let’s see how you can start with Payroll
Before you do anything else, register with HMRC as an employer if you are going to be employing people. Once you register with HMRC, you will be able to use their online services as well as get a PAYE login online.
These online services will make your life the easiest. It will allow you to send all reports for the Payroll to HMRC. Moreover, you can also register for email reminders, get alerts if you pay or report late, access tax codes for your employees and appeal any penalties.
Once you have registered with HMRC, the next important step is to find the best online Payroll software. Now, this Payroll software has incredible features that make Payroll the most accessible and most organized thing for you. You can check Xero, Sage and QuickBooks as they are currently the most popular payroll software out there in the market. They will allow you to record all the details about every single employee. Moreover, you will be able to calculate the pays, make deductions in the salary if there are to be any and send all reports to HMRC.
HMRC requirements for Payroll
There are specific requirements that HMRC has laid out for you. You need to fulfil all of these before or on the day you run the Payroll for your employees. We have mentioned them under the “What is Payroll” section.
Sending payroll reports
Sending payroll reports is essential. All the details of every single individual you have on Payroll need to be submitted. Whether they are supposed to pay income tax or not. HMRC has generated an easy way for you to do this. Simply login into your PAYE online and fill in the details via the payroll software, and you will be good to go.
Late reporting is not a good thing. However, HMRC is a bit nice about it. If you fail to send a report to HMRC even after you have paid your employees, a late filing notice will be sent to you by HMRC as a reminder. Now it’s up to you if you can convince them to not charge any penalty by coming up with a good enough reason for late reporting. If you cannot, then the sentences, usually start from £100 per month for any company which has employees ranging from 1 to 9. For companies with a higher number of employees, around £250 or more, the penalty rises to a whopping £400.
Appropriately paying your staff
Once you have everything in order, you must run the whole payroll procedure smoothly and pay your team adequately. What’s more important is that you perform every step at the right time.
Make sure that before you decide the pay for your employees, you are following all the minimum wage laws. In the UK, the current National living wage is £7.83 per hour. For everyone between the age of 21 to 24, it falls to £7.38 per hour. For people between age 18 to 20, it further falls to £5.90 per hour. And finally, for teenagers between 16 to 17, it falls to £4.20 per hour.
Calculating gross pay
Calculating gross pay is also an important step to appropriately fulfil the whole Payroll procedure. You must have a payroll department that is on top of what they do. They should be aware of all the amounts of pay and the frequencies of payments. Moreover, they should know the hourly rates for all employees. In case you pay your staff based on commission, they should be aware of how much they have achieved and calculate accordingly.
Now the net salary is calculated after all-important deductions have been made. In simpler words, it is the number of wages that the employer gets to spend all after having paid all the taxes and National Insurance Contributions. There is a list of things that should be deducted to calculate net salary:
- National Insurance Contributions
- Income tax on salary
- Student Loan Deductions (varies)
- Pension contributions if the employee has opted for a pension scheme
You are required to mention all of these details on the payslip dispatched to the employee.
A payslip contains all the information regarding the payment of the employee. The UK Employment Rights Act calls for every employee to receive a payslip from their employer on all paydays. It is up to the company if they wish to add any additional information on the payslip. However, there are certain things which are a must. These include:
- The method/mode of payment
- Net and Gross pay
- All the deductions made in the form of tax, National Insurance, Pensions etc.
The most commonly used method of payment used by UK employers is via bank transfer using BACS. However, there are several other methods which can be used, including CHAPS and Fast Payments Service. This decision of deciding mutual consent makes the payment method of both the employer and the employees.
You should also keep expenses in mind that any costs you owe to your employees will depend on whether the payment is entirely personal or business.
If it is a business expense, it won’t be subject to any National Insurance or Tax. On the other hand, if the payment you owe is personal, then it will be subjected to tax. Similarly, if there are any allowances that you wish to pay to your employees, they will fall under gross pay and hence will be taxed.
Steps on how to handle Payroll for small businesses
There are six essential steps in total to carry out a smooth and seamless payroll process. From these six steps, the first step needs to be carried out just once for each employee. This step will set up the employee in your payroll system. If you already have an employee in your payroll system, you should follow step 2 onwards.
Collect all the relevant documents of your employee
As soon as you hire an employee, you need to collect all the related documents. These documents include work authorization and tax forms. The materials are essential for the payroll procedure. These forms can vary depending on whether you’re in a contract with independent workers or hiring employees. The data on the types will help you add the employee to your payroll system.
Calculate Hours Worked
Now, this is not so difficult to achieve. You can maintain a timesheet by merely asking the employees to fill in the check-in and check-out time when they enter and leave. Moreover, note that the time taken for lunch is not counted as employees are not working at that time. In the beginning, a simple timesheet will do. However, with growth, you may find the need to come up with a robust time and attendance noting method. These systems can also be integrated with your payroll software.
There are different ways of wage calculation via time:
Straight time is the regular 40 hours worked in a week. The employee is paid a full hourly rate for 40 hours for the week.
Overtime considers the number of hours worked beyond the 40 hours mark in a week, and it can vary from place to place. The rules for overtime also vary from industry to industry.
Salaried people are paid a fixed amount of income. Which is regardless of whether they work 30, 33 or 40 hours a week. However, there is a minimum and a maximum number of hours agreed upon by the employers and the employees.
Calculating the Gross Pay
Calculating the gross pay is not that difficult if you have calculated the hourly wage correctly. You need to multiply the hours worked with the wage rate, and you will get the gross pay.
It is important to note that you keep a check of all the relevant deductions. As mentioned before, the deductions usually include a tax on income, national insurance, pension scheme payments etc. if you are ready to do your Payroll, you need to have all of this information at hand to follow up with the whole process.
Providing the Net Pay
The final step before the pay for the employee is calculated! Once you have the gross pay and the amounts to be deducted, you can calculate the net pay. Make all the deductions from the gross pay, and you will have net pay at your disposal. Now you have to transfer it to the employee. You can use any method to move the payment that we mentioned before. You can also integrate this with your payroll software like Xero, Sage or QuickBooks to automatically update all information on them and forward it to HMRC. The employees will receive the data as well about their pay.
Store Your Payroll Records
Once you have calculated and dispatched the net pay to the employees, the only work left to do is keeping a track record of your Payroll. This is important in the case that any issue occurs with HMRC. You need to have all the documents and information at hand to make sure that you did everything right. For this, you must store all your payroll records efficiently.
Using payroll software will do this for you automatically. Payroll software store all of this information in their backup servers as well as drives. As a result, you can access the information anywhere anytime. Moreover, if you file for tax returns via the software, HMRC directly receives it from it. So, the chances of any problem occurring are quite minimal.
Setting up Payroll for new or small business is as important as setting up the company itself. A good business has everything organized and in order. Having a robust payroll system will keep the employees happy as well. As a result, their productivity will increase.
Make sure you make use of all the modern technology available out there. Payroll software saves a lot of time and effort which you can invest in other important tasks. Moreover, you can take help from a professional accountant in case you are caught up on any issue. The solutions are always there; you have to look for them in the right place.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.