2.1 Payroll System Basics - What You Need to Know
In this module, we will look at the
set-up of your payroll system, how to do it, how to run it, how to manage it,
and the other various tasks also required in order to create the optimal system
for your business.
In its most basic form, a payroll
system needs to meet several requirements:
-It must pay employees the correct amount of money, on the correct
designated day
-It must make the correct deductions; in order to pay income tax and National
Insurance to HMRC
·
-It must pay any entitled extra payments to employees - such as bonuses
or tips
·
-It must allow the reporting of changes in employee circumstances to
HMRC
·
-It must incorporate effective and up-to-date recordkeeping
·
-It must generate documents (electronic or paper) - such as employee
payslips
·
-It must create accurate and up-to-date information, which should be
stored for up to three years after the tax year it relates to - as per HMRC regulations.
Assuming you will run the payroll
yourself, or have another member of staff (or more) responsible for this
important business function, the very first step is training.
You should seek to not only
familiarise yourself with the basics of an effective payroll management system
but also obtain a general overview of what a high-quality payroll system looks
like. You can try out the software, ask questions and network with other people
in the same situation as you.
It is recommended you train another
member of staff (to provide cover), and when a new member of staff is employed
with responsibility for payroll as their duty, you should ensure that they also
attend relevant training courses/workshops. Regular refresher courses are
recommended as HMRC requirements can change from time to time. Official
government websites will keep you abreast of changes, so monitor these in order
to familiarise yourself with the most current available information. The HMRC website is the best first port of call for
this.
Once you have acquired the basic
knowledge, you should decide how you are going to organise your payroll
function. For example; will you be paying your employees on a weekly or monthly
basis? This is an important decision that impacts your expenses and cash flow
etc; which is one of the main reasons that most employees are paid monthly,
especially in larger businesses;
Decide on a set payday and make it
standard for every employee. The set day does not change, unless it falls on a
public holiday (such as Easter or Christmas) or a weekend, when employees
should be paid earlier than this date and with prior notice given.
The next decision is to decide which
software package to use. You can trial many different software packages, with
SAGE being one of the most popular systems.If you employ less than ten people,
you can choose from several alternative free payroll software options. Find
more information on the Government website here: Payroll Software. However, ensure
you fully check the features of the programs when you test them, to confirm
they are suitable for your organisation.
For example, some payroll software
applications will not allow pension deductions or payslip generation.
After you've chosen the desired
package, allow yourself time to fully understand how it works and what it
offers, before you go live and provide your first submission
to HMRC and pay your employees for the first time. You need to register for a
PAYE log-in with HMRC. This allows you to enter employee information, including
monthly tax and National Insurance deductions, as well as how much they have
earned overall.
You must ensure that you register before the first
payday. At this point, you should have already registered with HMRC as a
business, which is an important first step.
PAYE allows the correct income tax
and National Insurance to be deducted from an employee's pay packet each time,
rather than being accumulated as a lump sum for the end of the tax year (which
is the case with self-employment, for example)
We will discuss PAYE in more detail
later - but you will need to register for your log-in ahead of time!
For PAYE you will require the
following forms:
-Employee forms
-Start of the year tax forms
·
-Expenses and benefits forms
·
-Payroll administration forms
At this point, you should now have
fulfilled your taxman requirements, acquired some important knowledge about
payroll systems and been trained. You have purchased your software package and
become familiar with the functionality. You have also decided the dedicated
date/period that you are going to pay your employees.
What is next? It is now time to
run your payroll system in the most effective and efficient manner, with
regular reviews to check progress.
2.2 The Importance of a Back-Up System
Back-up is hugely important
Unforeseen circumstances can and do
occur. Often, we cannot do anything about them, but what we can do is to
pre-empt these circumstances by putting safety measures in place to ensure that
the business continues smoothly, despite such problems.
For example - if you have just one
single person who runs the payroll system, what do you do if that
person is suddenly taken ill, or for some reason is unable to work.?
Hence you need backup plans.
Another employee needs to be trained
in executing the payroll and to regularly undertake payroll tasks to keep their
skills up to date. In large businesses this is rarely a problem, as there is
generally a department dedicated to payroll - thus if one person is unable to
attend work, the workload is absorbed within the department and shared amongst
the team. If you are a small business, however, this may not be the case, and
someone else needs to be ready to cover. It is important to have another
employee who knows the login details for the software package you are using.
Allow that person to shadow the main employee who is responsible for payroll on
a regular basis, to keep their knowledge and skills up to date. On top of this,
communicate to them any changes relating to HMRC requirements; perhaps by
keeping a folder with instructions and updating these as and when changes
happen.
Payroll is such a hugely important function within
a business for so many reasons, meaning that it is not a good idea to leave
running it just to chance. Cover all bases and you should have no problems,
regardless of events.
2.3 Communication Is Everything
We will discuss this in much greater
detail in a future module, but communication is vital in terms of letting HMRC
know when an employee's circumstances change.
It is possible for communication
issues to arise when you are using an outside source to run your payroll
requirements, such as an accountant or bookkeeper. That person is not on-site
and therefore may not be aware if a person leaves, joins, is off sick, is on
maternity leave, etc., so it is your job to inform them. If you do not do this
you are running the risk of a possible costly mistake, because that employee
could still be paid or paid incorrectly, and you are then going to have to
arrange to recoup the money, inform HMRC of the mistake, and rectify it. This
is time-consuming and, in the short-term, quite expensive.
The same kind of situation can occur
in larger businesses where departmental managers fail to let the payroll
department know about a change in circumstances - so, it's key to regularly
remind managers of the importance of this. Generally speaking, information is
passed from department to department, and a failsafe system needs to be put
into place to ensure that the correct information is received by the payroll
department within the right timescales. If this is not received by the time the
final payment for that month is submitted, then you have a costly mistake on
your hands and probably a rather disgruntled employee.
One particular idea for a failsafe
system is to have submission dates for relevant information to the right payroll
person.
For instance, if someone joins the company, make sure their new starter
forms and information sheets are passed to payroll by a certain day, which
allows the department to input this information and ensure the employee
is a) paid correctly and on time, and b) information
is passed to HMRC in the right timescale.
If you are working with an outsourced
accountant or bookkeeper, then the same system should be put in place. Ensure
that relevant information is passed over in a timely manner and ask for a
receipt so that both parties know the information is being correctly dealt
with, thus avoiding any problems and time wasting for all parties involved.
2.4 Documentation You Need to Generate as Part of Your
Payroll System
Having an effective payroll system in
place is not just about sending money to the right people at the right time,
but also about having the correct documentation in place too.
Employees must be in receipt of a
payslip whenever they receive a wage or salary payment from their employer.
Your payroll system software needs to generate this and your organisation must
provide this to your employee on or before payday.
2.5 What Information Needs to be Provided on a
Payslip?
A payslip should include employee
personal information, the tax code, the gross amount of money earned that
month, any deductions taken such as tax, National Insurance, pension
contributions or student loan repayments, any extra payments givens such as
tips, sick pay or maternity pay, and the final net amount of pay.
These should be displayed clearly on
the payslip in a way that the employee can understand. Pay is shown as net and
gross earnings, which we will explore later on, and a running total of the
yearly amount earned to date is given, as well as the overall annual salary
that the employee is on at that current time in their employment. If your
employee has an increment date, that is also displayed.
A payslip is given to the employee
electronically or in paper form in their place of work. If an employee is away,
i.e. on long-term sick leave or maternity leave, then a paper payslip should be
posted to them at their home address, if an electronic version is not
available.
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