23.1 A Reminder of the General Tasks Associated with a
Payroll System
We are now on the final module in this course and by now you
should have a much greater understanding about payroll; including what makes up
a payroll system, the different anomalies that occur, the ways in which you can
run your payroll and, of course, that adherence to HMRC guidelines is the
single most important aspect when it comes to payroll overall.
In this module, we will sum up your legal requirements as an
employer, because staying within the law is imperative. If you aren't aware of
your responsibilities, mistakes will happen, and in a worst-case scenario, you
could find yourself with a financial penalty at the very least. This is
something you need to avoid from the outset, and working within HMRC guidelines
is the only way to avoid mistakes and costly consequences. Here we will outline
the main responsibilities you have, and review them one by one.
Of course, you should always bear in mind that laws and
legislation change regularly, so always make sure you are always up to date
with any changes.
What is a payroll system? - a reminder of general tasks
associated with a payroll system
A payroll system is a method by which you pay your employees
for the work they do, deduct statutory and voluntary deductions from their
wages, and report it all to HMRC. Of course, that is the simplified version,
because there is much more to it than that, such as pensions and sick pay, for
example. However, on a basic level, this is what a payroll system is.
We have talked at length throughout this course about the
various details of a payroll system, but to refresh your memory before we move
onto the legal side of things, these are the basic tasks associated with a
payroll system:
-Recording employee pay every week or month, depending on
how often you pay your employees
-Making deductions according to statutory and voluntary need
-Reporting everything to HMRC and paying what you owe as an
employer
-Staying up to date with developments relating to payroll
and HMRC
-Using payroll software to complete all tasks
-Dealing with pensions, sick pay, maternity pay, employees
joining and leaving, as well as retirement issues
-Generating payslips and distributing them accordingly
-Using the Pay As You Earn system (PAYE) and Real Time
Information (RTI)
-Being a general point of contact for employees with any
questions or queries
-Carrying out all year-end duties, such as year-end
reporting and creating P60s for distribution to employees
-Storing important information relating to payroll in a
timely, safe and secure manner
Small businesses may choose to run payroll themselves, or
they may outsource their payroll duties to an accountant or bookkeeper; whereas
large businesses may have a department relating solely to payroll.
23.2 A Reminder of Why Businesses Must Comply with HMRC
Guidelines
Employment law reflects much of the HMRC guidelines, so you
know that if you stay up to date with employment law developments and changes,
plus you stay up to date with HMRC changes, you are making sure you meet your
legal requirements.
HMRC requires all employers to report employee wages and
deductions, using up-to-date and correct information in order to form the basis
for these deductions to be made. Also, HMRC gives legal guidance on other areas
such as the National Minimum Wage and the storage of employee records for three
years after the tax year they pertain to. Failure to meet any HMRC guidelines
can result in a hefty fine, interest charges, and possible legal action.
Tax evasion quite simply is illegal. Penalties in the UK for
tax evasion can be anything up to 200% of the total tax due.
23.3 Legal Obligations in Terms of the National Minimum Wage
We previously dedicated a whole module to the National
Minimum Wage, which should give you some indication of its importance.
It is a legal requirement to comply with these guidelines
and failure to do so can result in legal action and naming. Any contract which
consists of a wage below these guidelines is not legally binding. The rates for
the National Minimum Wage and National Living Wage change yearly. The most
current figures are found here.
The National Living Wage differs from the National Minimum
Wage for certain age groups. Any employers found to be not complying with the
National Minimum Wage requirements are in effect breaking the law and
investigations will take place.
Employees can report any employment whereby they are paid
under the National Minimum Wage. It is important to note that there are
instances when deductions to a wage can take the net pay under the minimum;
however, this is rare, and should only be due to the circumstances which we
discussed in our dedicated module on the National Minimum Wage.
23.4 Legal Obligations in Terms of PAYE and RTI
One thing we need to stress in terms of PAYE is that the employer
is legally responsible, whether the business chooses to outsource its payroll
duties or not.
Even if you employ an accountant or bookkeeper to carry out
your payroll duties, it is still your responsibility in the eyes of HMRC, to
ensure that PAYE information is reported every week or month, depending on how
often you pay your employees. For that reason, if you do outsource, you need to
ensure you are working with a reliable and professional individual.
It is also a legal requirement that all payroll software
should allow the employer to report PAYE information in RTI, or Real Time
Information. This means that employers now report PAYE information each time
they pay their employees; compared to previously when it used to be much less
frequent, with the aim being to minimise mistakes and anomalies, and everyone
knowing exactly what is going on at any given time. Failure to report pay and
deductions in line with PAYE and RTI has very severe consequences for a
business.
23.5 Legal Obligations in Terms of Pension Schemes
It is the law that employers must enrol employees into a
pension scheme if they meet certain criteria.
The current criteria for Automatic Enrolment to a workplace
pension can be found on the UK GOV website. Because of this, it is important to
ensure you opt for a payroll software package which allows auto-enrolment
contributions to be deducted from wages, to make the process easier. Failure to
comply with the auto-enrolment scheme is a) against the law, and b) affecting
your employees' futures.
23.6 Legal Obligations in Terms of Deductions from
Employees' Wages
One of the main functions of a payroll system is not only to
pay employees in the first place but to also make statutory and voluntary
deductions from wages, in order to pay and report to HMRC.
It is the employer's legal responsibility to make only
lawful deductions from an employee's wage, i.e. statutory deductions such as
income tax, National Insurance and student loan repayments.
Employees, however, can request that voluntary deductions be
taken from their wages too, such as pension schemes, healthcare schemes, etc.,
and in these cases, permission needs to be retained on file, as is written
permission to stop taking these deductions, when the employee no longer wants
this deduction to be made.
Statutory deductions must be taken by law and, as outlined
above, that includes income tax, National Insurance and student loan
repayments. In terms of student loans, only repayments can be taken if the
employee is earning above the outlined threshold, which changes from year to
year - it is important to stay up to date with changes for that very reason.
The only circumstance in which student loan repayments
should stop is when HMRC gives you permission or instruction to do so - the
employee cannot request these to be stopped, and if they do ask, they should be
told to speak to the relevant personnel at HMRC themselves. Not making
statutory deductions from wages is unlawful.
Employees should also be given a payslip each time they are
paid, and this should be received by the employee on or before their payday.
This should outline gross pay, deductions made in an itemised fashion, and the
net pay at the end. The tax code should also be visible on the payslip, and
overall it should be easy for the employee to understand, without technical
jargon.
.svg)
