Payroll

In the UK, paying an employee takes place through Her Majesty’s Revenue and Customs (HMRC) and the Pay-As-You-Earn (PAYE) system.

Definition

The payroll refers to two main things:

• The money a business pays to its employees: This includes salaries, wages, bonuses, commissions, and any other forms of compensation an employee earns. It’s essentially the total cost a company incurs for its workforce.

• The process of calculating, recording, and distributing these payments to employees: This involves tasks like:

  • Tracking employee hours worked using timekeeping software like AceRota
  • Calculating regular pay and overtime
  • Withholding taxes and other deductions based on regulations
  • Issuing paychecks or making direct deposits
  • Maintaining accurate records of employee payments

Key aspects

• Calculating Salaries and Deductions: this involves determining the gross pay (total earnings) for each employee based on their salary or hourly wage, working hours, and any bonuses or commissions earned. It also involves calculating deductions like income tax, National Insurance contributions, and any pension contributions.
• Pay As You Earn (PAYE): the UK tax system operates on a Pay As You Earn (PAYE) basis. This means employers are responsible for deducting income tax and National Insurance contributions from their employees’ salaries before paying them their net pay (gross pay minus deductions). These deductions are then sent to HMRC (Her Majesty’s Revenue and Customs), the UK tax authority.
• Payment Methods: traditionally, salaries were paid in cash, but now electronic bank transfers are the most common method. Some companies might also offer payroll cards as an alternative.
• Record Keeping: employers are required to keep accurate payroll records for a specific period, usually several years. These records should detail employee gross pay, deductions made, net pay paid, and tax and National Insurance contributions submitted to HMRC.

Importance of Payroll

• Accurate and timely payments: ensuring employees are paid correctly and on time is crucial for maintaining morale and trust within the organisation.
• Compliance with regulations: payroll involves adhering to various tax laws and regulations. Failing to comply can result in penalties and legal issues.
• Financial management: payroll is a significant expense for most businesses. Effective payroll management helps control costs and ensures efficient use of resources.

Key terms

• National Living Wage (NLW): this is the minimum hourly wage that employers in the UK must pay workers aged 23 and over. There are also lower minimum wage rates for younger workers.
• National Insurance (NI): this is a tax system in the UK that contributes to the National Insurance Fund, which funds public services like healthcare and social care.
• Employer’s National Insurance Contributions: employers also pay National Insurance contributions on top of employee contributions.
• Tax Code: this is a code assigned by HMRC that determines the amount of income tax an employee needs to pay.
• Payslip: this is a document provided to employees that details their gross pay, deductions made, and net pay received.