For many people, the idea of taking control of their PAYE calculations can be quite daunting. This guide aims to explain in simple terms what payroll involves and should go some way to help demystify the process and alleviate any fears. After reading this guide you should be able to see the payroll process is quite simple and with our online help and the HMRC guides you can be doing it yourself in no time. Throughout this guide you will find links (in blue) which will popup our glossary for a definition. Once you understand the process we suggest you read our getting started guide for details of setting up our system.
If you have one or more employees in the UK, then you, as an employer are responsible for ensuring H.M. Revenue & Customs' deductions are made. Income Tax, based on an individual's tax code and Employee's National Insurance Contributions must be deducted before the net sum can be paid. Employer's NI is also payable, but this is paid by the employer and is not deducted from pay.
All employers must register with HM Revenue and Customs and will receive either an HMRC payslip booklet or a letter explaining how to pay electronically. The employer deducts tax and national insurance from their employees' pay and then pay this sum over to HM Revenue and Customs. This can be done monthly or quarterly (by arrangement with HMRC) and the various payment methods are explained in the HMRC payslip booklet or letter.
When a new employee starts, they either give the employer a P45 or answer the questions on the starter checklist, which in conjunction with HMRC's guidance allows the employer to decide which tax code to use. Tax codes relate to how much you can earn before income tax kicks in based on the individual's personal allowance. The government usually changes the personal allowances in the budget so most people's tax codes change every April.
The employer gives the employee a payslip on payday which sets out the gross and cumulative amounts of pay and all the deductions. If applicable, pension deductions, maternity pay, Statutory Sick Pay (SSP) and other items can be shown on the payslips. The total payments, minus all of the deductions gives the net pay, which is the actual amount paid to the employee. Also on payday, the employer sends a Real Time Information submission to HMRC, giving details of each employee, the payments and the deductions.
The tax year begins on 6th April and ends 12 months later, on 5th April. At the end of the tax year, the employer issues a P60 to each employee, showing the year's earnings and the taxes and NI totals which have been deducted for that tax year.
When an employee leaves, the employer must issue a P45 showing the tax code, the date of leaving and the amount earned since 6th April. The P45 is given to the employee so that they can hand it over to their next employer.
Payroll processing ensures all the HM Revenue & Customs requirements are met, the correct net salary is calculated and the appropriate paperwork generated.