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Liv's Additions


November 2022
Payroll

What is payroll, really?

You might have heard of somebody saying ‘running a payroll, on the payroll, on the books’. These are all terms used for a process that a company will run to pay their employees legally. There are many parts to this process which I will break down here for you, but in essence this is where the employer will pay their employee’s and deduct the relevant taxes and such.

people handing cash to each other

The amount the employer will pay to it’s employees will be determined ahead of time but the real question is what needs to be deducted, how much, and where to put it after.

The good news is that HMRC now require all payroll information to be submitted through what’s called a RTI submission – this stands for Real Time Information – in short it means you have to use a software to do this. There are many great packages out there, some with more features and benefits than others and HMRC even offer an extremely basic one for free so technically it doesn’t actually have to add any extra running costs to your business if you just need the bare minimum.

people handing cash to each other

Every software will calculate the correct deductions for you providing that you put the accurate information in to start with. This can seem pretty daunting as you won’t want to get this wrong but it is simple! If you’re not sure you can always drop us a message or look on www.gov.uk for detailed guidance. So, the bits you need to put in; national insurance number, date of birth and tax code (if you have it from a previous employer). These are the real basics that will get you started. The national insurance number means that HMRC know which person you are paying tax over for, the date of birth determines the level of national insurance contributions that need to be deducted and the tax code will determine the amount of income tax (PAYE) that needs to be deducted. Pension contributions also need to be considered but I’ll explain more on this near the end.

Once you have plugged all of this in and set up your employees, you can then start running the payroll. You may have decided to do this weekly or monthly. Either is fine and the same rules apply to both. You will then enter in the amount you’re paying them, whether it’s an hourly rate or salary, any overtime and any bonuses etc. Expense claims and mileage can also be entered but be aware that these must be entered as non-taxable. Once you’ve added the pay going in, the software will calculate the tax etc that needs to come out. The number that is left aka the net pay, is what you pay your employees.

You can then send your payslips off to your employees and submit the all important RTI submission to HMRC. If you have entered anything incorrectly or if HMRC thinks that something needs to be changed then they will tell you once this has reached them – they’re very good at this!

The total of the tax and national insurance deducted is what you then need to pay over to HMRC. This must be paid to them by no later than 22nd of the month following pay day. For example if you run a payroll monthly and pay your employees on 5th September, you must pay HMRC by 22nd October.

Now for pension contributions. When you register your PAYE scheme with HMRC you will also need to register for a pension scheme. You can find a list of these on www.gov.uk or come and speak to us and we can help you decide. Every employer must have a pension scheme set up since the law changed in favour of an auto-enrolment pension scheme several years ago. This means that as long as an employee is eligible i.e. they’re old enough and they earn enough, then they will have pension contributions deducted. The current rates when I’m writing this is a minimum contribution of 5% paid by the employee and 3% paid by the employer and this is paid within a week or so (depending on the provider) of the end of the payroll. When you first enrol an employee on to your payroll you’re legally allowed to postpone these deductions for up to 3 months. Once the employee has been enrolled into the pension scheme and the deductions have started there will be a ‘cooling off period’ in which the employee can choose to opt out of the scheme if they so wish. If they do this then both pension contributions will stop and anything already taken will be refunded by the pension provider. This is in place for 3 years at which point they will automatically re-enrol. They can then opt out again if they wish but the cycle will keep happening every 3 years.

Now for a couple of questions I get asked from new clients pretty often;

I’ve just started my business and plan to have a team of people straight away. What do I need to do first, I have no clue where to start!

First things first if your budget allows it is to hire a bookkeeper (hint hint 😉) and they can sort all of this for you. Understandably it isn’t always this straight forward! Before finding your amazing first recruits you need to register for a PAYE scheme with HMRC. You will need to complete a form online, submit it to HMRC and then wait for a code and scheme reference number in the post – pretty old school! Once you have the code, you can then activate the scheme online and start using the scheme reference number on a software of your choosing.

I am a sole director of a limited company, do I need to have a PAYE scheme?

This one really depends on what your plans for the business are, how tax efficient you want to be and how you want to pay your tax. I will go over this in more detail another day as it’s a juicy question but in short if you want to be a ‘proper employee’ and get a payslip every month, pay your tax each month so you don’t have to worry about it at the end of the year then yes I would recommend starting a PAYE scheme. If you’d rather wait until the end of the year, you might have some expenses and allowances to claim and such, then you can leave it as is and just declare everything at the end of the year.