Payroll management is a crucial part of running a business in the United Kingdom. It requires businesses to not just calculate employee earnings, but also manage deductions like taxes and National Insurance. This ensures that employees are paid accurately and on time. 

For many companies, especially smaller ones, handling payroll in-house can be time-consuming and complex. They choose the option of payroll accounting outsourcing services to save time and energy. However, it is still important to comprehend the basics of payroll, which we will cover in this article. 

Basics of Payroll in the UK

Businesses in the UK can either handle payroll in-house using His Majesty’s Revenue and Customs (HMRC) guidelines or consider payroll outsourcing companies which assure HMRC regulated payroll processing to employees. 

Below are the steps for managing payroll:-

• Register as an employer: Before you start paying your employees, you’ll need to register as an employer with the HMRC.
• Set up PAYE registration: When you register as an employer online, you should get a login for PAYE (Pay As You Earn).
• Choose Payroll software: This software will be used to record employee details, calculate pay and deductions, and report to HMRC.
• Record all the necessary data: You’ll need details such as your employee’s full name, address, tax code, date of birth, start date, salary, and student loan information. You’ll also need their P45 if they are moving from a previous employment.
• Calculate Employees’ pay and deductions: Your payroll software will help with this.
• Report to HMRC: Record pay, make deductions, and report to HMRC on or before the first payday.
• Pay HMRC: Pay HMRC the Income tax and National Insurance deductions.
• Prepare for next year’s tax payments: You’ll also need to complete certain annual reports and tasks to prepare for the next tax year, which starts on 6 April every year.

Remember, it’s important to keep records throughout this process. If you’re a small employer paying less than £1,500 a month, you can choose to pay quarterly instead of monthly.

Understanding Payroll Accounting Calculation

Even with payroll software, payroll teams need to understand how to pay employees and how payroll is calculated. They should also be able to do manual payroll calculations:.

Here are the steps for payroll accounting calculation in the UK:

1. Determine Gross Pay

Determine Gross Pay is the initial step in payroll calculation where the total amount of money an employee earns before any deductions is calculated. This includes their basic salary and any additional earnings such as overtime pay, bonuses, or commissions. 

The gross pay forms the basis for calculating taxes and other deductions. It’s important to note that the gross pay may vary each pay period for hourly employees or those with variable income components.

2. Calculate Deductions

This is the step where various amounts are subtracted from the gross pay. These deductions include:

• Income Tax: The UK income tax system is based on marginal tax rates, so the total taxes due will depend on how much of your income falls within each tax band.
• National Insurance (NI) Contributions: These are mandatory payments made by both employees and employers to fund state benefits.
• Workplace Pension: If applicable, contributions to the employee’s pension are also deducted.
• Benefits in Kind (BIKs): If applicable, these are also calculated.
• Student Loan Repayments: If applicable, these are deducted from the gross salary.

The specific amounts for these deductions can vary based on individual circumstances and current rates.

3. Calculate Net Pay

After all deductions are subtracted from the gross pay, the remaining amount is the net pay, which is the amount the employee receives. The net pay will vary each pay period based on the gross pay and the total deductions.

The UK uses the Pay As You Earn (PAYE) system for collecting payroll tax. In this system, it is the employer’s responsibility to calculate the tax their employees owe, deduct it from their salary, and send it to His Majesty’s Revenue and Customs (HMRC).

Compliance and Reporting for Payroll in the UK

Compliance and reporting in UK payroll are crucial aspects of running a business. As an employer using PAYE for your payroll, you need to complete specific tasks each tax month.

Legal Framework

The legal framework for UK payroll legislation and regulations is primarily governed by several key acts. For example:

• The Employment Rights Act 1996 sets out the statutory employment rights of workers and employees.
• The National Minimum Wage Act 1998 provides a statutory right for workers to be paid a minimum wage.
• The Working Time Regulations 1998 govern the hours most workers can work.
• The Pensions Act 2008 made it a requirement for employers to offer a workplace pension scheme to their employees.

These laws collectively form the backbone of the UK’s payroll system, ensuring fair treatment of workers and employees.

HMRC Reporting Requirements for Payroll Accounting

The HMRC Reporting Requirements, specifically the Real Time Information (RTI) reporting, is a system implemented by the UK’s HMRC to improve the efficiency and accuracy of the PAYE system. 

Under RTI, employers are required to report wages, salaries, and other PAYE liabilities to HMRC in real-time. This means that every time an employee is paid, the employer must send a Full Payment Submission (FPS) to HMRC, detailing all employee payments and deductions. If no employees were paid in a tax month, employers must send an Employer Payment Summary (EPS) instead. 

At the end of the tax year, employers must send a final FPS or EPS to HMRC. This real-time reporting helps keep records up-to-date and makes it easier for HMRC to ensure that employees are paying the right amount of tax.

If your business operates in multiple jurisdictions or lacks in-house expertise, consider payroll outsourcing companies such as GJM & Co.

Conclusion

Understanding payroll is important for any business in the United Kingdom. By following the right steps and staying within the rules, companies can keep things running smoothly and keep employees happy. 

To manage bookkeeping and accounting services and payroll accounting effectively and with ease in the UK, consider GJM & Co. Our team of qualified taxation accountants and chartered accountants, helps you look after the nitty-gritty of payroll management so you can focus on your core business. Apart from this, we also offer services related to Business Formation, Virtual CFO, Taxation, and more. You can Schedule a call with us or also email us at  info@gjmco.com. Our goal is to help you grow and grow with you!