How to Set Up Payroll for Your Business
If you’re beginning a business and need to hire workers, payroll will become a crucial aspect of your operations. If you get it wrong, you could end yourself with disgruntled staff and HMRC penalties.
There’s a lot more to it than just paying your employees money. As a result, we’ve put together this guide to assist you in getting it right and staying in line with HMRC’s expectations.
What exactly is payroll?
Technically, your payroll is simply a list of all of your employees’ salaries. It has, however, come to refer to the process of controlling your employees’ compensation.
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As a result, the payroll process entails:
- Calculating and issuing each employee’s salary
- Bonuses and benefits management
- Calculating remuneration for unworked time (e.g. sickness, holidays, maternity leave)
- Taking care of employees’ tax and NI obligations (NI)
- Keeping track of all financial transactions for these purposes
Even for a tiny business, this may be a significant amount of labour. Many firms outsource their payroll function to a specialised supplier, such as their payroll accountant, to ensure accuracy and dependability.
You’ll need to conduct a payroll if you have any employees (not including partners in a partnership or LLP). This is also true if you are the sole employee of a small business (i.e. the director).
HMRC’s PAYE (Pay As You Earn) system collects income tax and national insurance contributions from employees. If you have employees, you’ll almost certainly have to use PAYE as part of your payroll.
If none of your employees is paid £120 or more per week (2020/21) you won’t need to use PAYE. You will, nevertheless, need to retain payroll records.
What is the best way to get started with payroll?
As an employer, the first step is to register with HMRC as an employer. This will allow you to register for HMRC Online Services and create a PAYE Online login.
You’ll be able to send HMRC payroll reports, obtain tax codes for your employees, appeal any penalties, register for email reminders, and receive notifications if you report or pay late via the Online Services.
The next step is to select payroll software that will allow you to simply record employee information, compute pay and salary deductions, and send this information to HMRC.
What does HMRC expect from companies?
On or before the employee’s pay day, you must complete the following while running payroll for them:
- Keep track of their pay.
- Calculate any possible deductions, such as income tax and NI.
- Make pay stubs for your employees.
- Calculate your employer’s National Insurance contribution if your employee earns more than £157 per week.
- In a Full Payment Submission, report all pay and deductions to HMRC (FPS)
Payroll reports to be sent
Businesses will be required to disclose information on anybody on their payroll, whether or whether they are liable to income tax. You can do so by entering your PAYE Online login information into your payroll software.
HMRC will send you a late filing warning if you’ve paid staff but haven’t sent an FPS or have sent one late.
Unless you have a legitimate justification for being late, they may impose a penalty. The fines start at £100 per month for businesses with 1 to 9 employees and rise to £400 per month for businesses with 250 or more.
Making a payment on what you owe
Part of an employee’s Class 1 National Insurance must be paid by the employer through their PAYE bill. The amount you pay will be determined by the employee’s salary.
Paying your employees
After you’ve figured out what’s expected of you as an employer, the next step is to start paying your employees. It’s critical that something gets completed correctly and on schedule.
The bare minimum pay
You must pay your employees in accordance with current minimum wage legislation.
For over-25s, the National Living Wage is presently £8.72 per hour (2020/21).
Making a gross salary calculation
To compute gross pay, the payroll department has to know the set amount, payment frequency (weekly or monthly), rate per hour worked, and, if pay is based on achievement, the amount per achievement.
You’ll need a means for recording hours worked, such as a timesheet or a clock card, to figure up an hourly rate. If commissions are paid, there must be a system in place to notify payroll of these amounts.
To calculate net compensation, subtract the gross salary from the total to determine what the employee would really receive.
Although there may be more depending on the circumstances, the following must be taken from gross salary:
- Taxes on earnings
- Contributions to National Insurance by Employees
- Deductions for student loans (if applicable)
- Contributions to pensions (unless they have opted out or are ineligible)
Where relevant, all deductions must be explicitly mentioned on the employee’s pay slip.
Every employee is entitled to a pay slip each pay day under section 8 of the Employment Rights Act of 1999. Companies can choose to include more information on their pay stubs, however all must provide the following at a minimum:
- Pay in full
- Quantity of deductions (tax, NI, pensions, student loan payments)
- Salary (net)
- Payment options
- Wage payment
The most popular way to pay employees is with a BACS bank transfer. This approach is used to pay roughly 90% of salaries.
Fast Payments Service and CHAPS are two other payment options. Whatever approach you use, you and your staff should agree on it.
If you owe your employees expenses, it will depend on whether you are covering a company or personal expense.
Business expenses that you must reimburse are not normally recognised as gross compensation and are so exempt from tax and NI. If the expense is for personal reasons, it will be taxed as gross pay.
Similarly, if you want to provide employees an allowance, it must be recognised as gross salary and will be taxed.
Benefits in kind (BiK) relate to non-cash items supplied by the employer, such as corporate cars. The majority of in-kind rewards are taxable and may be liable to National Insurance as well.
The process for deducting tax, however, differs from that of regular income tax. Instead of using PAYE, a P11D form specifying the applicable benefits must be filled out and submitted every year. The employee’s tax code for the next year is normally changed as a result of this.
Auto-Enrolment According to pension legislation, you must enrol your employees in a corporate pension plan to which you and your employees both contribute. While employees have the option to opt out, the majority of them choose to stay.
A solid payroll system will make auto-enrolment much easier to set up since it will have all of the information you need, such as the employee’s name, address, date of birth, and salary information.
Finally, some thoughts
It’s critical to follow the guidelines stated above to guarantee that you’re entirely compliant and have a robust system in place to reduce errors. An accountant may help you or handle your payroll for you, ensuring that it is in excellent hands and that records are delivered accurately and on time.
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