As your business grows and takes on employees then payroll is likely to become increasingly more important and complex. Last year, HRMC collected £373.4 million from SMEs (small and medium sized enterprises) owing to income tax errors which highlights the consequences of incorrect payroll execution and lack of understanding of fundamental PAYE (Pay As You Earn) concepts.
In light of this, we can see why it's essential for growing businesses to become updated on payroll rules and requirements to avoid expensive fines for often avoidable mistakes. For this post we will not only provide the basics of payroll, but also advice about how to navigate the ever-changing rules involving tax codes, national insurance, real time information reporting and pensions. This highlights why it might be preferable to outsource to a full service payroll bureau.
The first step in setting up your payroll scheme is to notify HMRC that you are an employer for PAYE purposes. Once complete and your company registration details are provided, your business can move forward and pick a software package that fits into your budget and meets your business' needs.
You can then begin to keep records of all payments and deductions each pay period, making sure there is clear evidence of each transaction. As new people are employed, get into contact with HMRC through RTI and let them know what type of tax code have been applied to each new worker. Though payroll mainly pertains to employees, don't forget about your mandatory payments to HMRC, something that can result in hefty fines if not paid and submissions are not completed to set deadlines.
Allocate adequate time for each of these steps because, though it may seem simple, often it's more complicated that at first envisaged and of course imperative employees pay is settled to deadlines.
As your business hires new people, each will have a tax code that places their earnings into a specific tax bracket. To avoid paying either too little or too much tax on a salary, you need to ensure the member of staff has provided you with the correct information to do so. This can feel like a harrowing task for the uninitiated and cause future issues if not completed properly at the original set up of the employee's record.
Usually employees will come with a P45, a document from their prior work stating their tax code and earnings in the tax year. If they do not have this document, you will need to fill out a starter checklist form that filters them into one of three different categories - employees with no prior job since 6 April (category A), employees with a previous job (category B), and employees that hold more than one job (category C).
Depending on which category they fall into, they will be assigned a tax code which you can then apply to their salaries. Though it is tempting to blindly accept an employee's tax code, the consequences if this is wrong could result in the loss of thousands of pounds and can cause unwarranted calls to HMRC to rectify in future months.
As an employer you’ll need to pay NI contributions on your employees’ earnings and benefits, you’ll also be responsible for collecting employee’s class 1 NI contributions and income tax deductions through the PAYE system. Because calculating this can be difficult and mistakes are costly, HMRC has provided tools such as the national insurance tax calculator, which helps businesses double check these calculations for accuracy.
RTI is the biggest change to PAYE since its birth in 1944. This provision no longer requests a single, year-end payroll report, but instead requires a PAYE statement each time you pay your employees in a pay period. By receiving reports before or on the day of each payroll, HMRC are more informed about employee salaries and thus will be able to deliver more accurate tax deductions.
They have noticed that the new generation of workers changes jobs quite frequently and thus their tax codes can be in a near constant state of change. Under the old PAYE plan, they would have to wait a year to change the tax status of these people, but now are able to instantly update tax codes as they alter and ensure accurate year to date figures are provided to new employers. While this might aid HMRC's efficiency, it poses potential pitfalls for small businesses that do not fully understand all these requirements.
We have found many growing businesses fill out forms incorrectly or at the wrong time and incur fines that could've been avoided. The main point to remember is to report your PAYE on or before the day you pay all employees. Business with nine or less employees can download free software that allows these reports to be made easily, while those with a larger office must purchase their own RTI systems.
Of note, many payroll systems will be RTI-ready but be sure to double check with your provider prior to the time when you need to submit reports.
Since 2008, the government requires employers to enroll their employees in a pension plan deemed compliant under The Pension Regulator rules and guidelines. Should your business have one employee or more, you are required by law to take part in this program as per the staging date given to your business by The Pension Regulator (TPR).
This involves not only a contribution from you, the employer, but also a minimum amount from the worker themselves, though you can cover both if you wish. The minimum contribution is currently 1% for both the employee and the employer giving a total overall contribution of 2% for 2017.
To ensure you are meeting all requirements of this law, The Pension Regulator website provides information that clearly outlines the business' duties as an employer. Some staff might not necessarily qualify but you can find out in this infographic which of your employees should be auto enrolled.
While the expansion of your business might be your main focus at the moment, don't forget you must find the time to focus on other important tasks such as payroll. Though this may feel less instrumental to growth, many businesses fall into trouble when they become too lax towards their payments to both their workers and HMRC.
As you will have noticed from this post payroll is potentially sophisticated and time consuming work. Therefore you may wish to outsource these services so that you can direct full focus to other matters such as strategic direction, managing employees, marketing and sales.
The content of this post is up to date and relevant as at 14/08/2017.
Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.