Payroll Advice for the First Time Employer
You’ll need a payroll if you have or plan to hire employees. Many accounting firms can handle this crucial task for you, but it’s still necessary to understand how payroll works.
Whether you administer your payroll in-house or have it outsourced, here’s a quick rundown of what you need to know. This article discusses the following topics:
- What exactly is payroll?
- What’s the best way to set up payroll?
- How much should your staff be paid?
- Other payroll deductions, such as pensions and benefits
- Payroll-based tax reporting (PAYE)
- How to Handle Payroll
You can also discuss your choices with an accountant that offer payroll.
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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.
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 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).
What steps do I need to take to put up my first payroll and register for PAYE?
To get started, you’ll need to register as an employer with HMRC. HMRC will then issue you your PAYE Reference as well as your PAYE Accounts Office Reference (don’t get them mixed up!). In order to file your payroll data with HMRC, you’ll need both of these numbers.
Now you must choose whether to manage payroll in-house or outsource it. You must use approved software if you prefer to do it yourself. HMRC has its own software (there is a free version for businesses with fewer than 10 employees), but there are numerous alternative options.
If you don’t want to handle it yourself, you can get a payroll service from an accountant.
How much should I pay my employees?
If an employee is 25 or older, you must pay them at least the National Living Wage. You must pay them at least the National Minimum Wage if they are younger (which varies depending on their age and whether they are an apprentice). Aside from that, you have complete control over wage levels. To recruit the greatest employees, you might wish to pay greater salary for positions you perceive to be exceptionally important. Remember, too, that a good benefits package and/or a good pension plan can be just as useful as a recruitment tool.
Because you are not subject to any minimum wage regulations as a director, your salary is slightly different. Many directors choose to pay themselves only their personal allowance for each tax year and get the remainder of their income in the form of dividends from company profits in order to save money on taxes. This can help you save money on your taxes in the long run, but there are certain hazards to be aware of, so talk to your accountant about it.
Deductions for pensions, benefits, costs, and other items
You must provide a workplace pension to all qualified employees, and you may also provide extra perks such as flexible vacations, childcare vouchers, gym memberships, lower insurance, workplace ISAs, and so on. Because these benefits are sometimes taxable, they must be processed through payroll or reported directly to HMRC using form P11D.
Compensation sacrifice can be used to give some perks, which means the employee agrees to accept a reduced salary in exchange for them (this makes the benefits cheaper as no income tax is paid on that money). These deductions will need to be calculated through payroll as well.
If an employee claims work-related expenses, you’ll need to keep track of them in payroll and refund the employee as part of their salary.
Finally, using Income As You Earn, you must deduct tax and NI payments from each employee’s pay before paying them (PAYE).
Payroll reporting for PAYE
If you’re handling it yourself, your payroll software will figure out how much income tax and NI must be deducted from the gross sum when you calculate each employee’s pay for the month. The net amount you must pay the employee will be left, and the remainder will be sent to HMRC.
Real-time reporting is also possible with payroll software. HMRC must receive all of your payroll information for the month (excluding the PAYE payment) before you pay your employees. To put it another way, it’s preferable to make sure this is done before you pay anyone.
Last but not least, you must pay HMRC. This must be done by the 22nd of the next month, however it’s preferable to start sooner in case of unforeseen circumstances (such as IT issues). You’ll need your PAYE Accounts Office Reference number to pay HMRC. Learn more about how to deal with PAYE.
What is the best way to manage my payroll?
Although you can manage payroll yourself using low-cost software or employ someone to do it in-house, there are some drawbacks. Payroll can be difficult for a non-specialist to manage, resulting in wasted time and possible errors. Similarly, if payroll is solely the job of one of your employees, you’ll need to figure out what to do when they’re sick or on vacation.
This may be more cost effective if you only have a few employees (say, five or fewer) and are comfortable managing them yourself. An outsourced payroll function, on the other hand, may be advantageous for a larger company. Payroll is inexpensive in comparison to the amount of security it provides, and it may free you up to grow at your own speed. Make certain to use a reliable accountant (beware of ultra-low cost online services as these may fall foul of the PAYE regulations). Payroll is likely to be included in your accountant’s extensive list of services.
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