Payroll in the UK

As a general rule, payroll in the United Kingdom is managed monthly or weekly as preferred. An integral part of the payroll process is to collect UK Payroll taxes from each of your employees' salaries. Employers who do not work in the UK must also consider both their employees' Income Tax and National Insurance Tax in the UK. Both of these are payable through the Pay As You Earn (PAYE) system.

The National Insurance and Income Tax rates that those working in the UK must pay each month changes regularly. The Chancellor of the Exchequer generally details these rate changes during their annual budget announcements. These payroll taxes are paid directly to HMRC (Her Majesty's Revenue and Customs) between the 6th and 22nd of the month following the payroll date.

What is payroll, and how does it work?

Again, the main way that employers arrange their payroll tax payments in the United Kingdom is through the Pay As You Earn (PAYE) system. Simply put, employers using this system must determine how much tax each of their employees is eligible to pay, deduct this amount from their wages and pay it to Her Majesty's Revenue and Customs (HMRC).

Besides ensuring that your employees receive the wages they are owed, employers must also send their deductions for their most recent taxes to HMRC on the 19th of every month. If they pay HMRC by post, the date is the 22nd of the month if they pay electronically.

Who prepares the payroll?

While it may be impractical or impossible for some businesses to divide payroll duties between their staff, doing so fully has many benefits. Of course, if you are limited in your staff, this division will be difficult, but it should be done where possible.

For example, you could have one staff member to prepare the payroll, one to authorise the transactions and a third to make the payments themselves. Dividing your UK payroll this way will help prevent any attempt at fraud, that is unless each staff member colludes together.

For those businesses that are too small to divide their payroll duties this way, ensuring that there are different people to review and authorise the payroll payments before they are made to the employees is the best way to make things work.

In an ideal world, each business will have its own Human Resources Office to prepare and oversee payroll payments. This office will also take detailed records of work attendance and any overtime payments that need to be made to the company's employees. They will need to know exactly how all this employment information is gathered.

Regarding those who prepare the UK payroll obligations, this work would fall to the Accounting section of Human Resources. Once this preparation has been done, the Head of Agency or their appointed representative will approve the payroll plans created if they are accurate.

What Taxation Rules Exist for Payroll?

Employers must comply with the Real Time Information (RTI) system regarding taxation rules for UK payroll. This requires you to complete the processes we have already detailed, namely that you report all payroll information to HMRC through the PAYE system.

As the name suggests, the RTI system requires to you convey all evidence and data regarding employee payments, income taxes and National Insurance contributions whenever they are made in real-time.

When establishing your company's running payroll system, bearing the different tax rates in mind is crucial. Corporate Income Tax for businesses and companies is set at 20%, while the individual Income Tax rate for employees ranges from 0%-45%. This individual tax rate varies depending on the employee's salary.

Aside from Income Tax, National Insurance contributions are also mandatory, and these payments go towards the UK's national social security initiatives. Employers will typically pay 13.8% in addition to their initial contributions, while employees must contribute 12%.

What are the steps for new business undertaking payroll?

Given that UK payroll is an internal process undertaken entirely within a business or company, it is almost the most important process outside of the main work of the business. It is, therefore, liable to be one of the most costly and time-consuming processes that the business undertakes.

Every business can be expected to undertake payroll obligations and complete them satisfactorily, viewing payroll systems as a simple and universal duty. However, the complexity of these systems, payroll software and the necessity to understand and comply with up-to-date regulations increase its difficulty.

Enrolling new employees

Every new employee who joins an organisation or business must submit information about their wage to be placed into the correct tax band and receive the appropriate tax code. This information can be details such as their pension contributions or National Insurance, statutory sick pay and maternity pay.

One vital distinction to bear in mind is the difference between salaried employees and freelance workers. Employers are directly responsible for the tax information of those they employ. Conversely, freelance workers must coordinate their own tax information and payments.

Obtain and use working schedule information

The only way to obtain this is for employers to have their workers employed on hourly contracts. Otherwise, employers will need to monitor the exact hours that their employees have completed closely. This second option may lead to fluctuations in salary earnings when payroll data is gathered.

UK payroll specialists strongly suggest that employers have managers thoroughly verify the hours that their staff have completed if only to avoid overspending when completing their payroll. Conversely, if a business employs its workers on a salaried basis, then the job becomes far easier.

Processing payroll

This processing naturally includes detailing each employees' wages based on their salaries and their hours worked. When completing their payroll obligations, businesses will better understand what each of their employees is costing them.

Of course, each business must supplement these costs with deductions from any number of financial benefits they are entitled to or tax obligations. These benefits could be anything from voluntary contributions to a pension scheme to purchases of business shares.

After these deductions have been made to the employee's payroll information, the employer will then need to calculate their tax obligations from their salaries. Tax reports generated by businesses are required at annual periods at the end of the tax year by HMRC.

Issue payments

After the employer has completed their payroll obligations and all reports have been checked and verified, they must pay their employees. This is an absolute legal necessity, and failing to pay the full amount of their salary on time can lead to serious consequences under the law. The easiest and most tax-secure way to do this is through direct deposit into the bank accounts of a business's employees.

Why is payroll processing important?

Processing payroll information is an essential element of any business for various reasons, including:

What to do if you can't process your payroll?

Suppose your business does not have the capacity or specialist knowledge required to carry out your payroll obligations. In that case, there are useful resources online at gov.uk for you to take advantage of. Naturally, there is always the option to outsource your payroll duties to third-party services.

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Are you looking for payroll accountants in Redcar, Middlesbrough and North Yorkshire? Penny & Pounds can help you  organise your payroll to ensure your employees are charged the correct tax.