Whether you’re a small, mid-sized or global business, when you hear the word “payroll” you naturally think about paying your employees for their hard-earned work.
And you’re not wrong, but there’s much more to it than that. The UK payroll system is quite complex and intricate, so as an employer, it pays to be in the know.
But don’t worry, we’ve specifically put this blog together to give you everything you need.
Key UK payroll terms you need to know
Trying to wrap your head around payroll terminology can feel quite daunting at times.
From the various taxes and deductions to the legal side of UK payroll, having a basic understanding of common terminology is a must.
Let’s take a look at some of the key terms used in payroll management today:
- PAYE (Pay As You Earn): PAYE is how employers deduct income tax and National Insurance from employees’ paychecks, spreading the payments throughout the year instead of a lump sum at year-end.
- National Insurance Contributions (NICs): NICs are the equivalent of social security in other countries, they are payments from both employees and employers to the National Insurance fund, which provides benefits like the State Pension. The amount depends on the employee’s earnings, with both parties contributing a percentage.
- Real Time Information (RTI): RTI is a system employers use to report payroll information to HM Revenue & Customs (HMRC) in real time.
- Automatic Enrolment: Since 2018, employers must automatically enroll employees in a pension scheme and contribute money to it.
- BACS (Bankers Automated Clearing Service): BACS is an electronic payment system used to make payments directly from one bank account to another in the United Kingdom. These payments typically take around 3 working days to process.
- HMRC (Her Majesty’s Revenues & Customs): HMRC are the UK government’s official regulatory body responsible for the administration and collection of taxes. This is done through its own system known as PAYE.
What is a payroll number
A payroll number is a unique identifier, typically consisting of numbers and letters, used by UK employers to securely identify and track payments and deductions for their employees. It is often the same as the RTI number, helping align records with HMRC.
Your 8-step guide to running UK payroll smoothly
Step 1: Register for PAYE
Before you can set up your payroll, you need to register with HMRC as an employer. Once your registration is complete, you’ll receive a PAYE reference number.
Step 2: Notify HMRC about your new employee(s)
Every time you hire a new employee or there’s a change in their circumstances, you need to inform HMRC.
Typically, new employees will have a P45 form from their previous employer, which will outline their tax code and other sensitive information that HMRC needs such as: The total amount of money their earned, and how much tax they paid.
If for any reason they don’t have a P45, you can ask them to fill out a Starter Checklist.
Step 3: Calculate income tax
As an employer, it’s your responsibility to calculate and deduct the appropriate income tax from your employees’ salaries. This amount is determined by their income, with higher earners paying a higher percentage.
HMRC assigns tax codes based on an individual’s personal allowance, indicating the amount they can earn before taxes apply. Different codes are used for different situations, like multiple jobs or taxable benefits, and HMRC issues them when you inform them about a new hire.
Step 4: Calculate National Insurance contributions
You’ll need to ensure you’re applying the correct National Insurance contributions (NICs) for your employees, determined by their earnings and employment status.
The amount to deduct is based on gross pay and NIC category, which is based on age and earnings.
Employers also contribute NICs, calculated from the employee’s gross pay and the employer’s NIC rate.
It’s worth noting that there are a variety of allowances and deductions available that can decrease your employee’s tax bill, such as the personal allowance and tax relief for charitable donations.
Make sure you’re aware of these so you can help your employees save on taxes.
Step 5: Pay your employees
Now the easy part, paying your employees.
You can use cloud based payroll software to manage your payroll in-house with accuracy, efficiency, compliance, and full control.
Step 6: Create employee payslips
As an employer, you’ll need to provide your employees with a payslip every time they are paid.
Payslips should outline gross pay, taxes, deductions, and net pay. Payroll software can automate this process, ensuring accurate and consistent information on every payslip.
Step 7: Keep records of all your payslips
Maintaining records of your employees’ payslips is vital. It facilitates tracking payroll costs, fulfilling monthly tax and National Insurance obligations to HMRC, and preparing the annual report for HMRC at the end of the tax year.
Step 8: Report to HMRC
You must submit Real Time Information (RTI) reports to HMRC with each payroll run, ensuring current details on earnings, taxes, and NICs to prevent fraud and errors.
Monthly deduction reports are due by the 19th (post) or 22nd (online). At the tax year-end, submit a final report to HMRC and give each employee a P60 form summarizing annual pay and deductions.
The two main ways you must make HMRC submissions are:
The top payroll mistakes businesses make
The most common errors businesses make when calculating employee pay include:
- Overpaying or underpaying.
- Using the wrong tax code.
- Missing the first paycheck for new hires.
- Deducting the incorrect amount for benefits or other payroll or tax deductions.
- Improperly compensating employees on leave.
Incorrect pay calculations are frustrating for both employees and employers. That’s why it’s very important to correctly calculate pay every time.
How to efficiently manage UK payroll
Managing UK payroll involves various stages and meticulous attention to compliance. It’s crucial to adhere to universal standards for accurate and law-abiding payroll practices.
Payroll software plays a key role in simplifying this process by providing comprehensive management in one place.
Sophisticated payroll software will help your HR and finance teams to:
- Provide full transparency.
- Maintain comprehensive records.
- Ensure that calculations are correct.
- Streamline processes more effectively.
- Enact automation for greater day-to-day efficiency.
- Use technology to facilitate easy access for all staff.
FAQs
What happens if I report late to the HMRC?
Failure to send a Full Payment Summary (FPS) on time or sending it late may result in a late filing notice from HMRC. If there’s no valid reason for the delay, you will most probably have to pay a penalty.
It’s crucial to submit complete FPS before the deadline to avoid impacting employees’ benefits. New employers risk PAYE scheme closure if an FPS isn’t sent within 120 days, emphasizing the need to plan on employing and paying someone promptly when applying as an employer.
When do my employees need to start paying tax?
If your employees earn less than £120 a week, you will only need to record and report their pay as they won’t need to pay tax.
But if they are receiving a pension, you’ll need to record this. And if they have another job, this may push them into a tax bracket, so this will also need to be taken into consideration.
Do I need to create employee contracts?
If you’re an employer in the UK, you’ll need to create a contract for each and every one of your employees.
In each contract, you’ll need to state their working hours, pay, roles and responsibilities. Your employees will need to provide you with their tax number and a P45 form.
Stay ahead of the UK payroll game with market-leading services
At JPS we love payroll and spend a lot of time and energy making sure we provide our clients with:
- Seamless, automated processes
- Powerful insights
- Absolutely compliant and secure software
- Top class multi-user support
If you’d like to see JPS in action, book a personalized demo.