Payroll doesn’t need to be complicated. With the right information, it becomes a smooth and manageable process.
What is Payroll?
Payroll is the system you use to pay your employees. It includes calculating wages, making deductions for tax and National Insurance, issuing payslips and reporting everything to HMRC.
It also covers pension contributions, statutory payments like sick or maternity pay, and any benefits you offer your staff. Not only does it ensure you pay your employees on time, it also helps your business stay within the law and avoid penalties.
How Does Payroll Work?
Each tax month runs from the 6th of one month to the 5th of the next. As an employer, you need to complete several tasks every month to meet your legal obligations and keep everything on track.
On or Before Payday
- Record employees’ pay; including bonuses, commission and holiday pay
- Use payroll software to calculate deductions for tax and National Insurance
- Work out your Employers’ National Insurance Contributions for each employee
- Produce payslips for each employee
- Submit a Full Payment Submission (FPS) to HMRC
Even if someone earns less than £123 a week, you must still report their pay to HMRC.
If No Employees Were Paid That Month
- Send an Employer Payment Summary (EPS) by the 19th of the following month instead of an FPS, which lets HMRC know not to expect a payment
Calculating Deductions
Payroll software usually handles the complex calculations. Deductions typically include:
- Income Tax
- National Insurance Contributions
- Student or postgraduate loan repayments
- Pension contributions
- Payroll Giving donations to charity
- Child maintenance payments when applicable
As an employer, you also contribute towards your employees’ National Insurance and workplace pensions.
Student Loans
The plan type determines the threshold and percentage deducted:
- Plan 1 – 9% on income over £26,065
- Plan 2 – 9% on income over £28,470
- Plan 4 – 9% on income over £32,745
- Postgraduate Loans – 6% on income over £21,000
These thresholds are subject to annual review and may change.
Issuing Payslips
You must give employees their payslips on or before each payday. A payslip must show:
- Gross pay (before any deductions)
- All deductions, such as tax and National Insurance
- Net pay (after deductions)
- Hours worked (if the employee is paid by the hour)
Additional useful details may include:
- The employee’s tax code
- National Insurance Number
- Year-to-date pay and deductions
You can either print payslips or send them electronically, depending on your setup and the employee’s preference.
Reporting Payroll Information to HMRC
Each time you pay employees, you must send an FPS to HMRC on or before payday. This tells HMRC what you have paid and what you have deducted.
Send an EPS in the following situations:
- You reclaim statutory pay (such as maternity, paternity or sick pay)
- You are eligible for Employment Allowance
- You are claiming deductions under the Construction Industry Scheme (CIS)
- You are liable for the Apprenticeship Levy
- You have not paid anyone that tax month
Submit your EPS by the 19th of the month so that HMRC adjusts your bill properly.
Paying HMRC
Every month, you need to pay what you owe to HMRC. This includes:
- Tax and National Insurance based on your FPS
- Minus any adjustments made through your EPS
The deadline for online payments is the 22nd of each month. If you are posting a cheque, it must arrive by the 19th.
If your bill is under £1,500 per month, you may qualify to pay quarterly. Check with HMRC or the payment helpline to find out if you are eligible.
What If You’re Late?
Late FPS or EPS submissions can lead to HMRC penalties. In addition, if your reporting is incorrect or delayed, it can affect employees’ eligibility for benefits such as Universal Credit.
HMRC also charges interest on late payments. To avoid problems, always meet the deadlines and keep your records up to date.
If you make a mistake, correct it by sending a revised FPS or EPS as soon as possible. The sooner you fix it, the less likely you are to face a penalty.
Other Payments to Record
Payroll is not just about base salaries. You must also include:
- Bonuses and commission
- Overtime and incentive pay
- Holiday pay (if not already in a regular accrual or rolled-up holiday scheme)
- Statutory Sick Pay and family leave payments
- Payments during suspension for health or maternity reasons
You must record benefits such as company cars or uniforms differently and report them at the end of the tax year.
When Employees Start or Leave
When someone joins, gather their information using a new starter checklist. This includes:
- Full name, address and date of birth
- National Insurance Number
- Previous job details
- Loan repayment status
This helps you assign the correct tax code. Include new starters in your next FPS.
When someone leaves, record their last working day in your FPS. Give them a final payslip and a P45.
Making Changes to Your Payroll
You can change the payday or how often you pay your staff. Update your payroll records and inform HMRC to avoid any issues. If you switch from monthly to weekly payments, most payroll software will handle the adjustment automatically.
For businesses that pay once a year, you can register for an annual PAYE scheme. You will only need to report once annually unless your payment pattern changes.
Contact Us
We are not just accountants; we are Chartered Accountants with one of the most reputable and premium accounting bodies. We are registered and regulated by ACCA; so you can rest assured that you are in good hands. Knowing this, don’t hesitate to get in touch with us if you require assistance: Pi Accountancy | Contact Us