When you’re forming a company there’s a lot to understand, including payroll. If you expect to have employees, or will be an employee yourself, you’ll need a payroll system. This introduction explains what you’ll need to know when you start setting up your company’s payroll, and how to go about it.
What is Payroll?
Payroll is the recording and controlling of salary paid to employees. This includes making the correct deductions and paying the right amount of Income Tax and National Insurance to HMRC.
All payments made to employees must go through a payroll system. As soon as you have an employee to pay you should have a payroll system in place, even if that employee is you. Your employees will expect payments to be accurate, as will HMRC, which is why every company needs payroll in place before they begin trading.
What do I Need to do?
As an employer it is your responsibility to complete all PAYE tasks, even if you decide to pay someone else to do them.
You need to make sure that all payroll information is given to HMRC on or before every payday. The information is submitted electronically, and should include the employee details, payments made and deductions taken, along with information about new starters and leavers.
Payments and Deductions
Payments you make to employees include their salary, any overtime they complete, statutory payments (such as statutory maternity pay, statutory sick pay and holiday pay). See the full list of other payments you might need to make here.
Deductions are normally Income Tax and National Insurance Contributions (NICs), but these can also include student loan repayments and pension contributions.
What is PAYE?
Pay As You Earn is the system used for deducting tax and National Insurance Contributions (NICs) from your employee’s wages to be paid to HMRC. Calculating what goes where can seem daunting for newly formed companies, so we’ve created a guide to make the process a little easier to understand.
PAYE is applied to all wages, payments made in cash (including expenses payments made in cash) and some benefits in kind.
You have to deduct NICs for all employees aged 16 years or over and under state pension age who earn more than £112 a week in tax year 2016/17.
Income Tax deductions are based on an individual’s tax codes. Both Income Tax and NICs must be deducted before the employee can be paid. Employer NI is payable, but is paid by the employer rather than being deducted from the employee’s pay.
If you decide to take on the task of completing payroll yourself, there’s a few things to get your head around. You can use either Basic PAYE Tools from HMRC or commercial software. You can’t use a manual system for submitting your payroll as HMRC uses Real Time Information.
Although HMRC’s Basic PAYE Tools software is available to employers, many companies prefer using commercial software. If you’d like to complete payroll in-house there’s plenty of software available many of which are free or cheap.
A more popular option than completing payroll in-house is to offload the task to a specialist. It might require a small investments, but will cut down your in-house costs and save you money overall. There’s plenty of paperwork required with payroll, so you’ll save time as well as not having to purchase software and the updates it will need.
Outsourcing to a payroll provider can give you piece of mind that everything’s completed correctly and leaves you free to deal with other tasks and the daily running of the business.
If you decide to outsource the only informatpion you’ll need to provide will be providing the hours/days worked by your employees which should be provided on each pay date. If you fail to submit this information you could be subject to fines from HMRC – so don’t be late!
You’ll also still need to make the payments to HMRC on each pay date. You can either make a transfer from your bank account to HMRC, pay online or set up a direct debit. If you’re a small employer expecting to pay less than £1,500 a month, you can arrange to pay quarterly.
Payroll still baffling? Why not give us a call on 020 3355 4047? Or leave us a comment below and we’ll get back to you!
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We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!