POSTED: October 11 2022
The Definitive UK Payroll Guide

The Definitive UK Payroll Guide | advo

If you’re a small business owner who is looking to hire your first employee or grow your team then it’s essential that you know how to pay your employees properly. Payroll administration is how you do this and it’s a legal requirement, so it has to be done correctly. After all, monetary distribution is a fundamental pillar of society. Getting your head around the system may seem daunting and confusing at first, that’s why our guide is here to clear up any justified ambiguities that you might have.

In recent years, many businesses who operate primarily outside of the UK have chosen to take on UK employees. If this relates to you, then it’s especially vital that you familiarise yourself with how payroll functions in the UK. This is because there are slight, yet important, variations from country to country.

What is Payroll?

In the simplest terms, payroll is how businesses calculate and pay their employees’ wages for a set period or date, commonly via direct deposit. Payroll doesn’t just cover how much the employee receives, it also takes pension contributions and corresponding tax payouts to the HMRC into account. In addition to this, it also concerns the financial records of each employees’ pay and is changeable owing to variables such as overtime and sick pay.

It is natural to consider payroll as being a responsibility handled by the finance or accounting department of a business. However, although payroll is financial in nature, it is an employee-facing function, ultimately meaning that it is a duty of a business’s HR department. Working hours, salaries, bonuses, changes to pay, and deductions are all elements of employment that HR professionals are tasked with controlling. That being said, in the case of small businesses that don’t have a dedicated HR department, it is usual that payroll is handled directly by the owner or a further associate.

Do you need to run Payroll?

If your business has one or more employees then you are required to run payroll for each and every employee. This likewise includes yourself and any other directional bodies because you’re defined as employees of the business. So, if you’re the only employee of a limited company, for instance, then you will also have to use payroll. For sole traders, however, payroll is not a legal requirement but is an option.

The consequences of failing to set up payroll as soon as you can are substantial fines and penalties against your business. This is why it’s so imperative to factor in when expanding your venture. Fortunately, sorting out payroll in the UK is a relatively straightforward procedure.

What do you need to do when hiring employees?

In order to take someone on as an employee for your business you’ll have to fulfil a checklist of actions. This is to ensure that you remain compliant with payroll. As said, it is a fairly simple process and involves the three following steps.

  1. Register your business as an employer with HMRC – this initial step is essential when you begin to take on staff or use subcontractors for construction work. It’s similarly a must that you register before the first payday. You cannot register beyond 2 months in advance.
  2. Enrol for PAYE Online – when you register your business as an employer you’ll automatically be issued a PAYE reference number within 5 working days. If you registered in a different way, however, you’ll have to manually sign up for a login.
  3. Tell HMRC about a new employee using a Full Payment Submission (FPS) – this step requires you to collect information about the new employee such as their date of birth, gender, full address, and start date. You’ll also need their P45 so that you can report their full name, leaving date from their last job, total pay and tax paid to date for the current tax year, student loan deduction status, National Insurance number, and existing tax code. It’s required that you keep this information in your payroll records for the current year and the 3 following tax years.

What is PAYE?

Having glossed over the second step of the last point, PAYE stands for Pay As You Earn. This is a rather important factor within payroll as it is the system used by HMRC to collect Income Tax and National Insurance Contributions (NICs) as your employees earn, by way of deductions. This must be carried out by you, as an employer, on behalf of the government for each pay period.

You’ll need to sign up for PAYE if your employees are paid £123 or more a week, don’t get expenses and benefits, don’t have another job, nor a pension. In addition, further deductions you’ll have to make include student loan repayments and pensions contributions.

How to run payroll

Typically, payroll is run monthly. A tax month spans from the 6th of one month to the 5th of the following. And to ensure that your payroll is in order and compliant there are a set of actions that you’ll have to carry out. If it’s the case that you’re an employer expecting to pay less than £1,500 a month, then it’s possible to arrange making quarterly payments by contacting HMRC. Monthly payments are to be made on the 22nd of the following tax month, whereas, quarterly payments are to be made on the 22nd after the quarter’s end.

Before paying HMRC you’ll first need to:

  • Record your employees’ pay, whether they are on a salary or are paid by the hour.
  • Calculate all the deductions to be made from their pay. This comprises Income Tax, NICs, and pension contributions, as previously discussed.
  • Calculate how much National Insurance you yourself will need to pay as an employer. As of April 2022, the current fixed rate is 15.05% per employee over 21 years of age.
  • Produce and distribute payslips for each individual under your employment.
  • Report pay and deductions to the HMRC by using an aforementioned Full Payment Submission (FPS).

Once all of these tasks have been addressed you’ll then be sent a full balance detailing what you owe the HMRC. This document will subsequently appear within your online PAYE account in around two days. Accuracy of figures is key here because any late or incorrect filings will mean a penalty charge. Alongside this monthly checklist, there are also annual jobs which you must carry out such as issuing P60s to employees, updating tax codes, and sending out your final payroll report. Employers are also under the obligation of Real Time Information (RTI) provision. That is, reporting to HMRC in real-time each instance at which you pay an employee.

Workplace Pensions & Employer Contributions

It’s a necessity that there is a compliant workplace pension within your business that’s available to all employees. If they are eligible, over the age of 22, and earn either more than £520 a month, £120 a week, or £480 over a 4 week period then they are entitled to be enrolled onto the government pension contribution scheme. As of April 2019, this consists of having employees pay a minimum 5% contribution that’s taken from their monthly earnings, with employers contributing a minimum of 3%. This totals to a minimum contribution of 8% of a given employees’ wages being put towards their pension fund. Failure to remain compliant with this rule warrants fines from The Pensions Regulator. Of course, employees also have the option to opt out of the auto-enrolment scheme if they wish.

Since it’s the job of the employer to work out an employee’s deductions, this means that they can rest assured about their own deductions. Therefore, it’s important to know that employees’ National Insurance rates are 0% for £533-£1,048 a month, 13.25% for £1,048.01-£4,189 a month, and 3.25% for over £4,189. For employers paying towards employees’ National Insurance, the rates fall at 0% for £533-758 a month and have a fixed rate of 15.05% on any salary above the latter. These figures concern the category letter of A and regard the 2022-23 tax year. For further information on this you can view, in full, the UK’s National Insurance rates for employers and employees on the government website here.

Student Loan Repayments

For employees who have a student loan, also to be deducted are their repayments for this. The amount that is deducted depends entirely on the employees’ income and their repayment plan. Each government plan has a separate threshold for employees’ weekly or monthly income. This constitutes 9% of the amount they earn over the threshold for plans 1, 2, and 4, and 6% of their total earnings over the threshold for the Postgraduate Loan.

The thresholds are £388 a week or £1,682 a month for plan 1, £524 a week or £2,274 a month for plan 2, £487 a week or £2,114 a month for plan 4, and £403 a week or £1,750 a month for the Postgraduate Loan. These figures are before tax and any further deductions down to exceeding paid holiday, sick days, or the purchase of a company car, for instance.

PAYE Compliance Checks

The way that the UK government audits businesses to see if they are paying the correct taxes is by carrying out a compliance check. This entails an inspection of employers’ payroll records. A situation such as this is why it’s important to have a strong level of organisation regarding these documents. To make sure that you’re prepared, should your business ever be selected for review, it’s paramount that you keep pertinent records. This comprises documentation for all reports and payments made to the HMRC, tax code notices, taxable expenses, employee pay and deductions, and employee absences.

Keeping compliance also means reporting to the HMRC when an employee departs from your business. This involves marking their leaving date on their payroll record, making the normal deductions when a FPS is sent out, providing the employee with a P45, and taking care of any residual contractual holiday time that has accumulated.

Payroll Software

This degree of responsibility is, naturally, rather overwhelming at first. However, the development of specialised payroll software programs has made the process a lot easier over the years. It’s for this reason that the majority of businesses today, both small and large, choose to outsource payroll services that come with heightened management capabilities.

Purchasing such services from a business outside that of your own works to lessen the burden of duty that is inextricable from being an employer. Shifting some of the responsibility allows you to save time on the whole payroll process so that you can instead allocate it towards improving your business. Moreover, having proper software integration will maximise the level of organisational efficiency within your business, thereby minimising the chances of internal mistakes occurring. This likewise benefits your employees by giving them the necessary accessibility to their payslips when they need to view them, all while keeping their confidential financial information private.

Payroll Services

If having all the complexities of payroll in the UK taken care of for you so that you can rest easy about this aspect of your business, whether small or large, then you’ve come to the right place. Here at advo we specialise in providing a seamless payroll service. And not only this, but access to our advo-one design integrates payroll, employee benefits, and HR software into a streamlined platform for both you and your employees to manage their entire workplace experience. Corroborating what we promise to deliver, our software has been officially recognised by HMRC.

Thank you for taking the time to read our guide, we sincerely hope that it has helped to comprehensively inform you on the UK payroll system. For further related news be sure to check out the regularly updated news section of our website. If you’re interested in gaining from the benefits to be had by outsourcing our payroll services then don’t hesitate to get your free quote from us today, you can contact us for more details. We look forward to hearing from, and hopefully working with you!

advo’s definitive payroll guide goes over everything you need to know about payroll as a business owner, including how to run it smoothly. Please note information is correct as of 11th October 2022. Figures quoted are subject to change and we cannot guaranteed they will be correct if read at a later date. It is therefore important to always seek advice either from a payroll provider or via the HMRC website