Managing payroll is a critical part of running a business. With proper management, employees are paid the correct amount on time and you ensure your business is fully compliant with the various tax laws.
But payroll can be complicated. There are all sorts of regulations to navigate, processes to follow and details to scrutinise. And while you can outsource your payroll services to a payroll professional, that’s not an opportunity for everyone. So, to help you understand the most fundamental aspects of payroll, let’s answer the most common questions we get asked by clients every week.
How do you calculate wages?
Payroll is fundamentally all about paying your employees for their hard work. So how do you calculate their wages?
The method you use will depend on the type of employee. For employees who are paid hourly, for example, you need to multiply the number of hours over a certain period of time they’ve worked (for example, weekly, fortnightly, monthly) by their wage. If overtime is involved, you just need to apply the appropriate overtime rate.
Salaried employees are usually paid monthly, so you should divide their annual salary by the number of pay periods in a year (for example, 12 for monthly, 26 for biweekly, or 52 for weekly pay).
Of course, you need to account for things like holiday pay, which should be paid at the normal wage. Statutory sickness pay is a weekly payment of £116.75 that employees can receive for up to 28 weeks if they are too sick to work – except for the first three days.
Make sure to keep accurate records of all hours worked, especially if you use flexible zero-hour contracts. Payroll software can be especially helpful.
What are payroll taxes and how are they calculated?
If you’re self-employed or have non-salaried income, like rental income, you’ll usually have to file a self assessment tax return to pay your taxes. Employees, on the other hand, face a different tax regime: PAYE.
Standing for pay as you earn, PAYE is a system that sees the employer deduct, or withhold, part of an employee’s wage. That deduction is then paid to the government as the employee’s income tax and national insurance contributions. If applicable, student loan deductions are also made based on the employee’s earnings threshold.
Meanwhile, you need to make sure you’re complying with pension rules. Under auto-enrolment, employees are automatically signed up to a workplace pension scheme, unless they opt out. Employers are required to pay 3% of an employee’s wage into the scheme.
How do you set up payroll for new hires?
If you’re running payroll yourself, you need to complete a set of tasks so you can begin paying a new employee properly.
When you take on a new employee, you’ll first need to gather some information, including their national insurance number and tax code from their P45. You’ll then need to set up an employee record, which can be either physical or electronic. This will be made up of multiple types of documents, including everything related to their pay.
Note that there is a whole other process for starting payroll for the first time as an employer.
How should payroll records be managed?
Accurate payroll record-keeping is essential for tax compliance and to ensure you’re not over- or underpaying employees. We have four main pieces of advice here.
- Keep payroll records for at least three years (though HMRC recommends six years), including payslips, tax codes and payment summaries. This will assist with any audit or review you decide to arrange.
- Maintain copies of employee payslips, tax withholding details and pension contributions.
- Use payroll software or a third-party payroll provider to automate and securely store payroll data. It will save you serious amounts of time.
- Invest in outsourced payroll services from a payroll expert. They’ll answer any questions and handle the details.
How do you handle year-end payroll forms?
At the end of the tax year, businesses must prepare and distribute tax documents to employees and HMRC. These include P60 forms, given to employees by 31 May, which summarise their total pay and tax deductions for the year. If employees receive benefits in kind (such as company cars or health insurance), you will also have to complete a P11D form.
Employers also have to file the full payment submission (FPS) to HMRC on or before your employees’ payday, even if they pay HMRC quarterly instead of monthly.
Thank you for reading our latest blog post. If you need any further advice, or would like to find out about our outsourced payroll services, get in touch with us today.