PAYE and Payroll - An Overview For Employers
What is payroll?
Payroll is when the company pays an employee or employees an agreed amount on a reoccurring basis, this could either be based on a set yearly salary or as an hourly rate.
As a company director you may also decide to process a company payroll for yourself and/or other directors.
What are my responsibilities as an employer?
It is your responsibility as an employer to correctly calculate the amount to be paid to each employee for each pay period (weekly, monthly, etc) and any relevant tax or other deductions to be taken from the gross pay amount.
This information must then be provided to the employee in the form of a payslip (and a P60 at payroll year end). HMRC must be updated on any tax that has been deducted on a monthly basis.
It is then your responsibility to pay the net amount to the employee and pay any tax due to HMRC.
Good accountancy software is essential to ensure that tax calculations are correct and the relevant PAYE submissions are made electronically to HMRC.
What is PAYE?
PAYE stands for "pay as you earn" and is a system for calculating tax due to HMRC by employers and employees as payroll is processed throughout the tax year.
This is in contrast to a self-assessment (personal) tax return for the self-employed or a corporation tax return submitted by a limited company where tax is calculated after the accounting year end.
Are there any relevant PAYE deadlines that HMRC must be updated by?
Yes. The company must send a monthly Full Payment Submission (FPS) to inform HMRC of what payments have been made to employees and of any deductions taken. The FPS must be sent to HMRC on or before the employees payday.
An Employer Payment Summary (EPS) is also required if the business needs to do any of the following;
reclaim statutory maternity, paternity, adoption, parental bereavement or shared parental payments;
claim the Employment Allowance;
claim National Insurance contributions holiday for previous tax years;
pay the Apprenticeship Levy.
An EPS must be made to HMRC by the 19th of each month.
The "payroll month" runs from the 6th to the 5th.
Do I need to set up an employee pension scheme?
If an employee is earning more than £10,000 per year and aged over 22 then a workplace pension scheme must be provided with pension contributions automatically deducted each month. This process is known as "automatic enrolment".
Employees do have the option of opting out of the pension scheme if they choose to.
Employees can make a voluntary request to contribute to a company pension scheme if their income exceeds £6,240 per year (£520 per month).
The minimum contribution by employees in an automatic enrolment pension scheme is 5% of gross earnings. The employer must also make a minimum contribution of 3% of gross earnings.
Company Directors do not qualify for automatic enrolment although they may choose to contribute to a company pension scheme.
Do I need to set up payroll?
There are some circumstances where payroll may not be suitable or applicable.
If an employee earns less than £123 per week (£6,396 per year) and has no other PAYE income then payroll isn't mandatory. This is because they will be earning below the National Insurance (NI) contribution threshold.
If the work completed is ad-hoc or a one off task then the work may not be classed as employment. In this case, the worker may be categorised as a self employed contractor.
It is important to consider IR35 rules when employing self-employed contractors.
What are the benefits of paying a directors salary?
It can be beneficial for a limited company director to set up payroll where they are not employed via PAYE by another company. This is because the director can earn NI contributions as a director via PAYE payroll.
Directors payroll can be used to reduce corporation tax liabilities by reducing taxable profits.