1.1 What Exactly is a Payroll System?
A payroll system is used to pay your
employees at a designated time (e.g. weekly, monthly).
The employee should be informed of
the date and frequency of payments at the beginning of their employment and
this should be the same for all employees. You should maintain this frequency for the duration of
employment.
Payroll is defined as the total of
all compensation an employer must pay to their employees for a set period or on
a specified date - paying salary and deducting income tax, National Insurance,
pension contributions, student loan repayments, and other optional benefits
such as healthcare insurance contributions.
A payroll system must also keep
up-to-date records, report changes in employment for each employee to HMRC, and
keep detailed reports for the end of the tax year. The term also covers the
issuing of payslips for employees, P45s for those who leave, and P60s at the end of each tax year.
Every business that employs staff needs a payroll system which runs effectively
and is understood by several people; in the event that the one person who does
understand it is off sick or away for any reason. The payroll system also needs
to cover all the requirements of HMRC. There are many different variations on
this, on how you do it, who does it and how often you do it. We will discuss
the payroll system in more detail as we move through our modules, but put
simply, when setting up a business you need to make a decision that works for
you in terms of paying your staff and how you are going to do it.
1.2 Why Do You Need an Effective Payroll System?
Having an effective payroll system
allows your business to run smoothly.
If your system does not work well, if
there are problems with it or failures in communication, you will incur difficulties.
Employees expect their salaries to be paid correctly. It is vital that you keep
correct records and make the right deductions; ensuring the correct information
is reported to HMRC.
This will be one of the most important decisions and functions you will put
into place in your business throughout its entire lifespan. Ensure you give it
proper consideration; do your research, check out your options, find out what
works best for you, and then put enough dedicated time into it on a regular
basis to get everything just right.
Also, when it comes to
record-keeping, which we will cover in a little more detail later, you need to
study Data Protection laws; as you will be storing personal information about
your employees. This comes with legal action and severe penalties if you do not
adhere to the strict guidelines that are in place.
Large business or small business, it
all works a little differently, but the end result is still the same. We
now know what a payroll system is and understand why you need to put an
effective system into place; a system that you understand completely and can
run smoothly, However, it is also important to understand that the size of your
business could affect how your payroll system is implemented and undertaken.
The larger a business is, the more
employees it will have, so payroll requirements will be more complex compared
to a smaller business with just a handful of employees. Within a large company,
there may be employees who are paid different amounts each payroll run; usually
because they are working their way through an incremental scheme, whereby their
wages increase every year they work there, to a certain point.
Because of this, the payroll system
will be complicated and completely different for each employee. Thus, if there
are a large number of people within the business, you can understand why this
particular function can be dedicated to an entire department - as it is so
important to get it right and it is just not feasible to dedicate this task to
solely one person.
Conversely, a smaller business with
just a few employees may find that payroll is a quick and simple task, because
there is less complexity and overall it is not as time-consuming. In this case,
one or two people could be relied upon to complete payroll duties.
As
a side note, however, always have someone else within your business who
understands the system, in case of sickness or annual leave.
Ultimately, it does not matter how
big or small the company is, who does the payroll and how much an employee gets
paid, HMRC still needs the same information - big or small, the end result is
certainly always the same from this point of view.
1.3 Why You Need to Please the Taxman
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Because HMRC requirements are such a
huge part of payroll, we will cover this in much more detail to ensure you tick
every box and don't fall foul of any problems.
Let's briefly discuss why you need to
cover everything the taxman requires, without omitting anything.
If you do not report changes,
maintain and upkeep records, or pay the right amount of income tax and
National Insurance to HMRC, you will not be complying with the law, and could
incur fines. So, understanding these requirements is probably one of the
biggest decisions and processes you will undertake in your business.
HMRC will
not take ignorance of the facts as an excuse for missing important
requirements.
PAYE
The main task you need to adhere to
is the PAYE scheme. PAYE stands for Pay As You Earn and is part of
the HMRC system for paying income tax and National Insurance contributions.
As the employer, you have to deduct
income tax and National Insurance contributions before you pay wages, benefits
or pensions to your employees. Employers are required to use tax codes to
calculate how much income tax to deduct from employees' salaries. The PAYE
system has been designed in a way that individuals are able to pay their taxes
as soon as they begin to work. Every employer is responsible for running the
PAYE system; you may opt to hire someone or outsource this responsibility to an
accountant or payroll professional.
Employers must send in their returns
to HMRC that show how much they owe and how much is paid. In 2014, the
government introduced the RTI (Real Time Information) scheme, whereby employers
report each time they pay their employees instead of at the end of the year.
This makes PAYE reporting quicker, easier and simpler.HMRC has a right to
inspect the wage forms and records of any UK-based employers. It is therefore
essential that you get wages and deductions right to avoid being fined by HMRC.
1.4 Do You Use An Accountant or Do You Give It a Go Yourself?
If you are concerned about how you
are going to perform this large and important task, note that there are options
for someone else to do it for you. However, you need to weigh up the pros and
cons of this before you make a final decision.
An accountant or bookkeeper is
experienced in payroll and will set everything in place for you. They can also
run your payroll system for you and can present the figures to HMRC on your
behalf, once authorised. That is the upside of it.The downside? One slip in
communication, for example, forgetting to tell your accountant that someone has
left the company, could cause that person to still be paid; resulting in a
protracted process of recouping the money and rectifying your payroll records
with HMRC. Small mistakes such as this can be costly and time-consuming.
Additionally, you are going to incur
costs in paying your accountant for conducting your payroll needs. On the
other hand, you can do it for yourself in-house. If you have a large
business payroll should be managed by either your HR or Finance department. If
you are running a small business with a handful of employees this may mean that
you take responsibility for payroll, or employ another person to do so.
Doing the payroll yourself would save
you money but it can be time-consuming and you may run the risk of making
mistakes that a dedicated and fully-trained staff member might not make. In
either case, you should consider cross-training another member of staff to take
over this responsibility in the event whoever does your payroll is
absent. It is generally wise to employ a professional, however, it is a
personal decision on who runs your payroll for you, and one which has to be
thought about carefully in terms of cost and responsibility.
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