First published on Thursday, July 18, 2024
Last updated on Friday, September 27, 2024
Whether you’re looking to pay yourself a salary from your own business or need to pay a team of employees, you must register and run a payroll scheme.
Apart from ensuring that payments are made on time, this will account for deductions such as Income Tax and National Insurance contributions (NICs). It’s known as the Pay As You Earn (PAYE) system.
We’ll share a complete overview of employer payroll responsibilities here, taking a deep dive into the legal framework, tax obligations, and best practices for efficient management and compliance with UK payroll laws.
Overview of employer payroll taxes
The UK’s payroll system has been through various changes, with PAYE first introduced back in 1944. In more recent times we’ve seen the introduction of Making Tax Digital and the extension of workplace pensions.
As a UK employer, you must stay aware of such updates, ensuring that payrolls are processed in line with relevant regulations.
First, you’ll need to register as an employer with the HMRC. While you must be prepared to answer questions about paydays and subcontractor involvement, the process should be quite straightforward. Upon successful registration you’ll be given a PAYE number. This may have to be shared with employees and insurers for confirmed legal compliance.
PAYE registration will be essential where there’s an employee who has:
Been paid at least £123 each week within the current tax year (since 6 April)
Received company benefits (including a pension) and cover for expenses
Been previously employed
Received Jobseeker’s Allowance, Employment and Support Allowance, or Incapacity Benefit
You can make payroll processing that much easier and less stressful with an automated payroll system. This will ensure that your payroll is managed according to law, with reports being generated and shared with the HMRC.
While PAYE exemptions may be made, all companies should collect and keep payroll records.
The legal framework for payroll taxes
As a UK employer, you’ll know the need to pay staff salaries, along with bonuses. Employees also have the statutory right to paid leave for holidays, sickness, and other types of leave. However, employment tax and national insurance will have to be made in most instances.
The level of PAYE deduction will depend on the employee’s tax code, the amount earned over the Personal Allowance, and the level of income within each tax band.
While income under £12,570 per year isn’t taxable under the current system, charges will be made at the following rates:
20% for those earning between £12,571 and £50,270 per annum
40% for those on annual salaries of between £50,271 to £125,140
45% for those earning over £125,140 per annum
National insurance must also be paid according to employment status and earning level. Mainly taking the form of Class 1 national insurance contributions (NICs), such payments have to be made for the receipt of benefits such as State Retirement Pension and Jobseeker’s allowance.
Primary NICs are paid by the employee, while secondary NICs are your responsibility as the employer.
Class 1 NICs are to be deducted from the employee’s pay at the following rates:
0% for those earning £118 to £166 per week
12% for those on £166.01 to £962 per week
2% for those earning more than £962 per week
Employers paying £118 to £166 per week are currently exempt from having to pay class 1 contributions. However, there’s a standard rate of 8% for those paying upwards of £166.01 per week.
You must also account for tax, National Insurance and reporting obligations specific to employee bonuses. When made in cash, such bonuses must be counted as earnings in addition to the employee’s salary —being deducted and paid on a PAYE basis.
This may also apply to non-cash bonuses, where they can be easily converted into cash. However, you’re advised to check the tax rules that apply to specific items.
Employment tax obligations
As mentioned, employer NI contributions are required by law. A payslip must also be produced, with details of tax and NIC deductions. Again, you’re bound to find the process easier with payroll software that can handle your tax obligations for you.
Provided that you enter the correct details, payroll software will automate the calculation of owed tax and national insurance. It will highlight the amounts that must be transferred to the HMRC, together with any reductions that can be claimed. While monthly HMRC transfers are most common, you may opt to pay quarterly.
The HMRC should also be notified if:
A new employee joins
There’s a change in an employee’s circumstances (as when they reach State Pension age or become a director)
An employee has received benefits in kind (such as a company car, accommodation, or other substitute for cash)
Reports must be shared according to the deadlines set by the HMRC. This includes the real-time reporting of employee payment data, with a full payment summary (FPS) and employee payment summary (EPS) having to be shared.
These financial details should also be recorded:
How much your employees have been paid
Any deductions taken from employee pay
Payments made and reports shared with the HMRC
Tax code notices
Taxable expenses or benefits.
Such records must be kept for 3 years from the end of the tax year that they relate to. They may be checked by the HMRC to ensure that you’re meeting your employment tax obligations.
Handling payroll audits
You must make tax payments and maintain records according to HMRC rules. You should also be prepared for routine payroll audits. Which involves the checking of tax records to ensure that you’ve been meeting your legal obligations. The HMRC may arrange such an audit at any time and with little warning.
You can go some way to ensuring that your company will pass HMRC compliance checks through the organisation of internal audits. Led by your internal payroll department or a specialist payroll partner, such an audit should be carried out at least once during the financial year.
It will involve thoroughly checking your payroll data to ensure there are no mistakes that could result in major fines and reputational damage. If errors are found, they should be fixed immediately for ongoing compliance.
These checks should be made as part of a payroll audit:
That the same employees are listed on your payroll as your employment records
That all employees (including those employed on a contract basis) have been paid accurately according to working hours
That any additional payments (such as for promotions and bonuses) have been made correctly and that no fraud has been committed
That correct payments have been made for periods of leave
That employment taxes have been correctly withheld from wages
That all payments reconcile with your payroll records.
A report will ideally be produced, highlighting the findings of your payroll audit. This should be shared with your HR and finance for the optimisation of payroll efficiency.
Penalties and consequences
You must be aware and take steps to avoid compliance breaches, which can lead to heavy penalties and legal consequences. As an example, you’ll run the risk of missing HMRC payment deadlines without careful payroll management. In such an instance, you’ll face a potentially significant penalty for late tax filing.
Here are some other payroll mistakes that you should look out for:
Incorrectly classifying employees as freelancers or contractors—potentially resulting in incorrect tax calculations, unpaid benefits, and other hard-to-resolve issues
Using incorrect tax codes—potentially causing the overpayment or underpayment of employment taxes
Payment miscalculations as a result of data entry errors, outdated payroll systems, or failure to account for updated legislation.
The HMRC may exercise its discretion and cancel penalties for such mistakes if it can be proven that you’ve taken ‘reasonable care’.
This will mean giving evidence of accurate record-keeping. Checks should also be made if you’re in any doubt over your tax obligations, with the HMRC being promptly informed if you discover any errors.
Get help with your payroll taxes from BrightHR
Having covered the tax responsibilities and non-compliance consequences, you may well recognise the need for payroll support.
However, you can save yourself the expense of hiring an in-house expert thanks to BrightHR’s outsourced payroll service. From payroll calculations to communications with the HMRC, we can take the full strain of payroll management.
With a rapid set and the assured support of CIPP-qualified payroll professionals, this is the payroll solution that your business needs. So go ahead and book a free payroll software demo today!
