The Different Elements Surrounding PAYE And Payroll Payments
Updated: Oct 17, 2022
PAYE and payroll payments are two of the most integral parts of running a business.
Even if your business only employs one person, you still have PAYE and payroll responsibilities that you need to act on. These need to be implemented as soon as the new employee starts.
In this guide, we’ll cover what you need to know about PAYE and payroll to help make running your business a bit easier.
Understanding PAYE and Payroll Taxes
Understanding PAYE and payroll deductions are necessary for all employers and employees in the UK. Payroll deductions include any taxes that employees and employers need to pay based on their salaries, as well as things like National Insurance and pension contributions.
Employees pay payroll tax from a deduction out of their salary. Employers then pay these PAYE and payroll taxes to HM Revenue and Customs (HMRC).
Let’s break this down into more detail.
What is PAYE?
Pay As You Earn (PAYE) is a tax system that pays income tax every month, as a portion of an employee's salary. PAYE works by deducting the tax and National Insurance contributions from an employee's wages or salary each month before paying them.
PAYE is a standard process for employers to include as part of their payroll. It’s essential to get this right every time you pay employees.
PAYE is deducted from any payments you make to employees. This includes salaries and wages, as well as things like tips, bonuses, maternity pay, and more.
If your employees are paid less than £120 per week, and if they don’t qualify for benefits then you won’t need to register them for PAYE.
All businesses will need to keep clear payroll records though.
What Does PAYE and Payroll Include?
Getting PAYE and Payroll right is one of the most important parts of managing your business’s accounting. So, what PAYE and payroll deductions does your business need to make?
Gov.UK publishes the full list of compulsory deductions that all businesses need to make. A basic summary of these compulsory dedications include:
Employee Income Tax deductions
Class 1 and 1B National Insurance
Class 1A National Insurance on termination awards and sporting testimonials
Student Loan repayments
Construction Industry Scheme (CIS) deductions
Apprenticeship Levy payments
Student and postgraduate loan repayments
Compulsory child maintenance deductions
Real-Time Information (RTI) Reporting
Real-Time Information (RTI) reporting is a system that was introduced around PAYE and payroll in 2013.
Before RTI, businesses had to file their reports on deductions to HMRC at the end of the financial year. Now, with RTI, employers have to report payroll calculations throughout the year. These calculations need to be given to HMRC online.
RTI improves PAYE and payroll efficiency and makes it a lot easier to stay on top of your payroll each financial year.
Part of PAYE and payroll deductions include pension plans. All eligible businesses in the UK need to enroll their employees into a pension, which the business then pays into.
As soon as a company makes a new hire, they have a legal duty for this employee. So before bringing on new staff, it's essential to understand your PAYE and payroll responsibilities and set up systems like pensions, etc.
Different Elements Of PAYE And Payroll
Managing your business’s payroll system effectively involves a variety of forms.
Your business needs to send these forms to employees, to help them understand their gross and net pay, tax, National Insurance, and any other deductions made to HMRC within a financial year.
Here is a brief outline of the different forms involved.
Employers must provide their employees with payslips every time they pay them. The payslip needs to contain all information about how much the employee was paid, and what deductions were made.
This includes tax and NI deductions, as well as deductions like pension contributions.
A P60 form is an end-of-year certificate that details an employee's total earnings over the course of a financial year. These certificates are necessary for claiming overpaid tax and applying for tax refunds.
A P11D form shows any benefits that an employee has received from the employer over the course of a financial year. These benefits are anything beyond the employee's salary. This includes things like private health care or company cars.
A P45 form is what any employee gives their new employer to register the employee in their payroll system.
This form includes parts for both the employer and the employee’s records. When an employee leaves the company, their employer has to provide them with a P45 form.
The end of the financial year means payroll administrators need to report their PAYE information to HMRC. This has always been known as a time-consuming, dreaded task, although the introduction of RTI has helped make this a lot easier.
RTI lets employers manage their PAYE reporting responsibilities throughout the year, instead of all at once.
This makes PAYE reporting faster and more accurate. It also eliminates a lot of the pressure that manual calculations and form submissions once brought.
Getting PAYE and payroll right is a vital part of business administration. If you understand PAYE and maintain your RTI responsibilities every cycle, keeping your payroll on track is actually relatively easy.
Be sure to make the correct deductions, submit the correct forms, and don’t fall behind on your payroll duties.
Using the right accounting software is one of the most important ways to make managing your business finances a whole lot easier. With the right tool, you’ll be able to maintain clear financial records which makes reporting a breeze. This lets you spend less time worrying about PAYE and payroll, and more time focusing on your business.