When you take on a team as a new business owner it means getting to grips with payroll.
In terms of the law, getting it right means putting PAYE into place and making sure you keep up with your reporting and regular payment requirements.
It’s not just the taxman who benefits from you having the right systems in place, though. Staying on track with payroll means avoiding the hassle and time wasted in dealing with incorrect or late paycheques. It also means that as your team expands further you have the processes in place to accommodate this easily – without getting bogged down by admin.
Payroll and PAYE: the essentials
- When you first take on an employee you need to register as an employer with HMRC. This includes the situation where you are the only director of a limited company and are effectively ‘employing yourself’. You can register online.
- Unless very limited exemptions apply you are required to operate PAYE as part of your payroll. This involves deducting income tax and National Insurance (NI) from employees’ salary and paying it to HMRC. Other payments that might have to be deducted at source include student loan repayments and pension contributions.
- You are also required to keep payroll records.
- For tax and NI you usually have to pay HMRC each month. For small employers who expect to pay less than £1,500 a month, there is an option of paying quarterly.
- Through your payroll software, you will tell HMRC about payments and deductions as they are made.
- There are penalties and interest charges if you pay late. Interest is charged daily at 3%. If you fail to deduct income tax and NI from employees’ wages you – and not your employees— are liable for any shortfall.
Should I keep payroll in-house or outsource it?
You have the option of operating PAYE and payroll by either doing it yourself using payroll software or by paying a payroll provider to do it for you. Your decision is likely to be affected by how many people you intend to take on and on how comfortable you are with dealing with everything within your business, as opposed to handing it over. When making your decision bear in mind the following:
- It’s possible to get software packages that are designed to automatically calculate deductions, including automatic calculation of statutory sick, maternity, student loans and attachment of earnings. The aim here is to keep data input on the user’s part to an absolute minimum.
- When considering in-house software packages look for the ‘PAYE recognition’ logo. This means that the solution has been tested to ensure it is compatible with HMRC’s ‘Real Time Information (RTI)’ reporting procedure and that it is capable of sending the relevant RTI submissions to HMRC. In addition, check the reviews, demos and walk-throughs yourself to make sure you can get to grips with it before you commit to anything.
- You may conclude that to save time (and therefore money) you’d rather outsource your payroll to a third party. ‘All singing, all dancing’ services are available, but be wary of signing up to a service where you are paying for lots of additional functionality that you don’t really need. Again, be sure to check reviews and reputation, especially when it comes to data security.
- Remember that whether you keep it in-house or outsource, payroll remains your responsibility.
What records do I have to keep?
You are required to record the following:
- All wages paid to employees and all deductions.
- Tax and NI deductions from wages.
- Other deductions such as student loan repayments, pensions deductions and child maintenance payments.
- Tax code notices.
- Taxable expenses or benefits.
- Payroll Giving Scheme documents: whereby employees can donate to charity from pay before tax is deducted (HMRC gives further guidance on what’s involved with Payroll Giving).
These records need to be retained for three years from the end of the tax year they relate to otherwise you can be faced with a penalty of up to £3,000. It may sound daunting, but remember that your payroll software should give you everything you need to enable you to generate these records with minimum hassle.
What happens on and after payday?
Whether you pay your staff weekly, fortnightly or monthly you will use your payroll software to inform HMRC about salary/wages payments and deductions via Full Payment Submission (FPS). This is usually done on or shortly before payday. You then will follow a monthly routine:
- From the 12th of each month, you can view your FPS and see how much money you owe for tax and NI.
- By the 19th you will need to claim any reduction on what you’ll owe HMRC (e.g. for statutory sick or maternity pay.)
- By the 22nd you will need to pay HMRC what you owe. For same day payment opt for online or telephone banking or CHAPS. You can also pay online by credit or debit card, by Bacs, by direct debit at your bank branch or by post, but for these methods, you need to give three working days for the payment to clear.
You must notify HMRC about new employees before they receive any pay. Most of the information you need to do this will be found on their P45.
The good news is that payroll software is designed to take the legwork out of dealing with payroll each month so an expanding workforce need not mean a growing mountain of paperwork.
Is this the right time to expand your team? Check out our help centre for further information about taking on employees.