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Pop the kettle on, it’s time to make yourself a cuppa whilst we take a good look into running payroll in the UK. Understanding the intricacies of the British system of contributions and taxation can be tricky, but with clear guidance and the right payroll software—you’ll have it down to a tee in no time.
For every business, payroll is the accountable spine of any organisation, as your employees need to know they’ll get paid correctly and efficiently. Essentially, payroll is the system that businesses use to calculate and administer employees’ salaries in accordance with a country’s legislation and local tax requirements.
In the UK, the payroll process includes the following calculations:
- Add up gross pay including base salary, overtime and bonuses
- Less national taxes and contributions
- Less pension payments and other deductions
- Finally, work out the net salary to be paid to each employee
Sounds simple? As you can see, this is a lot of information to process. Let alone within individual locations’ vastly different financial systems outside the UK. Therefore, payroll must be done accurately and on time as per the accepted legal framework of the market you are working in. For Britain, this is HM Revenue and Customs (HMRC), the administrative body for all things taxation, but it’s one complicated beast. Say hello to payroll software, here to save the day.
Do all businesses need to use payroll?
In a word, yes. No matter the size, scope or location of an organisation, when it comes to payroll, the finance team needs to be everything, everywhere, all at once. Taxation and employee law is a living, breathing thing in the UK, so any company must stay across the current regulations and legal obligations. Compliance is the watch word in any HR department and when it comes to staying on the right side of the law, ignorance is no excuse.
Most payroll rules revolve around business finances. So, accuracy is vitally important, in both adherence to the most up-to-date letter of the law but also, the very payroll calculations themselves. Today, the best way to ensure all this is working effectively is by using a comprehensive payroll software offering like those from ADP. Streamlining such payroll processes is a no-brainer for any organisation—you meet your legal requirements, and everything ends up adding up nicely.
How to run payroll?
Payroll is a complicated operation in any and every location. Depending on the sector or contract type, people might be paid weekly, fortnightly or monthly, therefore payroll teams’ demands and timescales can be markedly different. Remember, accuracy and efficiency are a non-negotiable, however often your payroll needs to be run.
It might be useful here to get into the specifics, so let’s dive into payroll running basics.
Here’s the UK payroll process in four simple steps:
1. Set up with the HMRC
Every business in the UK needs to be registered with HM Revenue and Customs (HMRC), the UK’s inland revenue and taxation department. Depending on the type and size of an organisation, there are different definitions and rules to comply with, e.g. its charitable status or number of employees. Established companies will already have a long HMRC history, but it’s always good to check everything is as expected.
2. Calculate employee gross pay
Work out the gross pay for each employee. This includes the employee's basic salary, overtime, bonuses and any other additional earnings. Don’t forget to take into account any statutory payments, such as sick pay or maternity pay.
3. Deduct income tax
Under the Pay As You Earn (PAYE) system, use the employee's tax code, provided by HMRC, to calculate the amount of income tax to be deducted.
4. Deduct National Insurance and other contributions
Each person belongs to a specific National Insurance category, related to income bracket, so you need to calculate this accordingly. There might be other deductions such as pension contributions or student loan repayments, so remember each person has individual needs.
Everything relating to payroll calculations—payments, income tax and any other deductions—should be clearly documented in employees’ payslips, whether on paper or, these days more often than not, electronically.
How to manage payroll?
We’ve seen the principal stages of managing payroll and organising staff payments, but when it comes to compliance and the minutiae of payroll management, there are a lot of boxes to tick, so you know you’re doing it correctly and to the letter of the law. That’s where payroll software comes in, as it is made to comprehensively manage payroll, all in one place.
There are universal standards for payroll management that need to be adhered to for good payroll practice. Any payroll software should help HR and finance teams to:
- Keep detailed records
- Double-check that calculations are accurate
- Streamline processes more effectively
- Enact automation for greater day-to-day efficiency
- Use technology to encourage easy access for all staff
- Offer good levels of transparency
Outside the British system, any payroll will need to work differently. Good multi-country payroll software will be able to manage various locales seamlessly. So, whether an employee is in the UK or elsewhere, your payroll management system will consider country variants and adjust the process accordingly.
The main legislation you need to know
When it comes to payroll and payroll software, there are clear rules and regulations to follow. For every company across Britain, failure to comply with employment law and tax obligations is a serious matter that could result in prosecution, fines and even prison. So, making sure you know where you stand and what your legal commitments are is essential.
In the UK, our main employment and taxation laws include:
- The National Insurance Act (1911)
This is the foundation of the UK's social security system, which funds various benefits, such as the NHS, through National Insurance (NI) contributions.
- The Employment Rights Act (1996)
This is a key piece of legislation in the UK that safeguards the rights of employees, covering aspects such as termination procedures, redundancy and protection against unfair dismissal.
- The Income Tax Act (2007)
Established the legal framework for income taxation, outlining the rules and regulations governing the assessment and collection of income taxes.
- Other ongoing legislation and amendments
Stay alert. Legislation is being continually updated, so payroll, HR and finance teams need to be up to speed with any changes.
For HR and finance teams in the UK, the main payroll failures in complying with this legislation are often round timely delivery and accuracy of tax and contributions calculations.
Here are the two main financial aspects to consider, if you want to avoid any payroll penalties:
- Late delivery
Be on time, all the time. Penalties can stem from late delivery of annual tax returns or late payment of tax monies due. Remember, the UK tax year runs from 6th April to 5th April—with corporate tax due eight months later on 1st January the following calendar year. So, keep these dates at the forefront of any payroll planning, although such deadlines are usefully built-in to payroll software to keep you on track.
- Inaccurate returns
This is the big one. Accuracy is the watchword of any payroll compliance system and HR team. As the HMRC website attests, you can incur significant penalties if corporate tax is calculated improperly in any of the following ways:
Keeping it accurate across the correct tax codes, employment law and system changes and individual circumstances, and company obligations is a lot to manage for any team. But payroll software can help with this.
Fortunately, good payroll software extends beyond just the nuts and bolts of UK tax and contributions calculations into employee relations and record-keeping as well. So, you can ensure you’re legally covered on the people side of UK employment law, as well as those all-important financials. Payroll software is made to keep all these ducks in a row — so you fully understand and seamlessly adhere to UK employment law.
Using PAYE for your employees
For the UK and many other countries, pay-as-you-go is the standard. Payroll tax and national or social insurance contributions need to be organised by the business and paid to the tax department directly from an employee’s gross salary at source. As opposed to employees’ calculating their contributions themselves—as per self-employed sole traders in the UK or personal tax returns in the United States.
For the UK, the PAYE system takes income tax and NI deductions automatically from the employee’s salary, so ensuring accuracy and standardisation is essential to any payroll team. It can be much more difficult to fix tax code or contribution errors after the fact. And these can result in financial penalties if done incorrectly.
Here are UK-specific rules to tick off any PAYE checklist:
- Ensure the correct tax codes
- Know your HMRC tax law
- Understand NI contributions
- Check for student loan contributions
- Comply with pension obligations
Fortunately, for all the complicated processes outlined here, there are brilliant payroll software solutions out there that can manage the mountains of information and legal requirements in the British system for you. Payroll software like ADP’s is streamlined, adaptable and intuitive to use, so your UK payroll is a piece of cake.