Payroll: what you need to know | Concept Accountancy Newcastle

Payroll is a legal requirement for all businesses that have employees. It can seem daunting but it is a simple process as long as you follow the guidelines.

There are several tools and a myriad of software available to help manage payroll, or Pay As You Earn (PAYE) as it is known. Some small businesses ask their accountants to carry out the job.

Payroll facts

You should start as you mean to go on and get it right first time. As well as making sure you are paying employees the correct amount, you need to make the right statutory deductions from their wages.

The deductions are paid directly to the government and it is a legal requirement to do so. We explain more about the requirements of limited companies on an earlier blog.

What is PAYE?

This is the system that HRMC uses to collect Income Tax and National Insurance Contributions (NICs) from employees’ salaries.

How does it affect employers?

The government makes employers responsible for deducting tax and NICs from the salaries of employees. Employers must do this for each pay period, which is usually monthly, and pay the appropriate amount to HMRC. If employees’ earnings are above a certain threshold, you also must pay Employer’s Class 1 NICs. You then need to supply each employee with a payslip. The slip outlines what PAYE deductions have been made.

How much tax and NICs is deducted?

When you employ someone, you should request both their tax code and National Insurance number. With this information and earnings to date, you calculate how much tax and NI that needs deducting.

Making payroll calculations

You can manually calculate what needs to be paid using details from HMRC. But it can be complicated to work out. If you use book-keeping software, such as Xero or QuickBooks, then this reduces the burden as it calculates deductions and generates payslips automatically.

How to pay tax and NIC deductions

You normally have to register as an employer with HMRC before making PAYE payments. Check HMRC’s website to see if you need to register. Payments can be made electronically, including direct debits or BACS transfer. There is also the opportunity to pay by cheque, if necessary.

How often to I need to run payroll?

You need to send the most recent pay deductions to HMRC by

22nd of each month if you pay electronically
19th of each month if you’re paying by cheque in the post

You may also be able to pay quarterly or annually, but check this carefully.

PAYE forms

You need a number of payroll forms. As well as factsheets that tell you how to operate PAYE correctly and for telling HMRC about your employee and pay details, you require four specific forms. These are:

Employee forms
Start of the tax year
Payroll administration
Expenses and benefits

You need to submit these forms to HMRC at various points throughout the business year. You can find out more here and can download them from HMRC’s website.

What should I do next?

As we’ve already mentioned, there is plenty of choice of book-keeping software. These help you take the stress out of dealing with payroll forms and online returns with HMRC. If you have a smaller business and prefer to outsource, you can always ask an accountant.