How Does Payroll Work
If you run a business and employ members of staff, or plan to in the near future, having an effective payroll system is highly important. Having an efficient payroll service is vital to keeping your employees happy and ensuring the long-term success of your company.
It can seem like a good idea to run a payroll manually, however mistakes can be time consuming and costly to fix and can potentially lead to fines from HMRC. For this reason many businesses choose to outsource their payroll process to an accountancy firm. However, it’s still important to have a good understanding of how the process works.
What is Payroll?
Payroll can be defined as a list of a company’s employees who have salaries paid to them on a regular basis. However, it can also refer to the department which looks after paying staff. The payroll process should commence as soon as you hire your first employee and requires regular management to keep everything running smoothly.
Payroll can be confusing and time-consuming for many businesses so we’ve broken the following down to make it easy to follow. Please note the following steps need to be carried out either on, or before, pay day each week or month.
Log hours worked
It sounds obvious but if you have staff who are paid hourly you will need to keep track of how many hours they’ve worked. If staff are being paid a flat rate salary you won’t have to worry about recording hours, only deducting hours not worked (unpaid leave etc).
To ensure you’re paying the correct wages to your staff you’ll have to ask them to fill out timesheets and submit them by a certain date. Do make sure that you remind your employees to keep track of their hours and to check their timesheets from time to time to ensure that hours are being accurately recorded.
The next step is to calculate your employee’s gross pay. Depending on whether your employees are paid hourly or receive an annual salary this is done slightly differently. Pay includes things like bonuses, commissions, holiday pay, maternity pay and sick pay.
To work out an employee’s final pay amount, you’ll need to deduct tax from their gross pay, the most common deductions being Income Tax and National Insurance which all employees over a certain threshold have to pay. You may also need to deduct student loan repayments, pension contributions and child maintenance payments from the total.
You can work out the amount of tax due to be deduced using the employee’s tax code and National Insurance category letter from HMRC. As a business you will be responsible for paying the National Insurance contribution on each employee’s earnings above £166 a week. As it is now a legal requirement for all businesses to enter their employees into a pension scheme you may also need to deduct payments towards pensions for employees who are eligible.
Report to HMRC
Another legal requirement is that you report all payments including deductions to HMRC as well as paying them. If you are an employer you need to complete certain tasks during each tax month. The tax months run from the 6th of one month to the 5th of the next.
Reporting to HMRC is done through a ‘Full Payment Submission’ which can be done automatically through payroll software.
To set this up you will need access to your PAYE reference and Accounts Office reference, which you should have on record from HMRC. If you are unable to send a Full Payment Submission either on or prior to your employees pay day you may receive a late filing notice or even a fine unless you have a valid excuse.
If any of your employees circumstances change such as when someone retires or you have a new starter you must inform HMRC as part of this process. Through this reporting process you will find out how much you have to pay HMRC in tax and national insurance you’re due to pay them on a monthly basis. However, if you expect to pay out under £1,500 a month, you can pay quarterly. Please note it is important that you inform HMRC if you’ve not paid any employees in a tax month.
Once you have worked out how much your employees are due it’s important to create payslips for them so they can see the breakdown of amounts paid and any deductions. Payslips should show:
- Pay before deductions
- The amount (and type) of deductions
- Pay after deductions
- The number of hours worked
Pay your staff
Once you’ve done all of these calculations and reporting you’re all done and you can relax in the knowledge that your staff will be happy come pay day!
Many companies find that outsourcing the payroll process to trusted experts highly valuable in terms of saving time and money as well as avoiding any potential mishaps. Contact BNA Consulting today to find out how we can help manage the entire payroll service London for you so you can have complete peace of mind.