A helpful guide to UK payroll
If your small business is growing, it’s only a matter of time before your current accounting solution will need to expand to include payroll.
But payroll brings with it a whole new set of challenges, from making national insurance contributions for your employees to managing a regular payment schedule.
Before setting up payroll for your employees, you will need to familiarise yourself with UK payroll legislation, minimum wage laws, and tax rules. This will help you to create a comprehensive payroll end of year checklist and avoid mistakes.
Make sure you pay close attention to the payroll details outlined below to have the best chance at successfully transitioning your business into this new stage of growth.
Payroll laws in the UK
There is no single law that stipulates how you must carry out your business’s payroll. Rather, many different laws and legislations come together to shape the approach you take. Every business will have to adjust their payroll to suit their industry and unique needs, but these are some significant laws you should be aware of:
- Employment Rights Act (1996): Any employee you hire should be treated in accordance with this law, which means issuing them with payslips, lawfully deducting taxes and pension contributions from their salary, and allowing them to have paid time off in accordance with the hours they work.
- Income Tax Act (2003 & 2007): These laws don’t just relate to the income tax employees pay on their wages, but the taxes you have to pay as an employer. While you will be responsible for ensuring employees pay their tax through PAYE, you will also have payroll tax to pay.
- Part-Time Workers Regulations (2000) & Agency Workers Regulations (2010): Both of these laws work to make sure that non-full-time employees and contractors still receive fair pay and rights. The rules for part-time employees are different from full-time, but that doesn’t mean they aren’t entitled to certain benefits such as holiday pay and reasonable working hours.
Collecting tax with PAYE
As mentioned above, you will need to collect both taxes and national insurance payments from your employees on behalf of the government. This is conducted through the PAYE (Pay As You Earn) Scheme, which should be supported by the payroll software you use.
When hiring someone new, you are required to register their details and tax code with HMRC. You should be able to gather this information from a P45 from their previous employer.
Once your employee has been registered, you can begin submitting the information surrounding their pay, tax deductions and pension contributions to HMRC. You will need to do this monthly or weekly depending on your setup, ensuring that all tax payments are made by the 22nd of the following month. The whole process is known as FPS or Full Payment Submission.
When managing payroll, it’s important to ensure that every employee is being paid a fair wage. The National Minimum Wage Act (1998) means that you legally can’t pay your employees less than the amount set by the government. This number can change from year to year, with the current amounts as of April 2022 being:
- Apprentice: £4.81
- Under 18: £4.81
- 18-20 years old: £6.83
- 21-22 years old: £9.18
- 23+: £9.50
These rates apply regardless of whether your employee has a fixed salary, is being paid on an hourly basis, or has variable contracted hours.
An estimated 61% of businesses in the UK outsource payroll to an external provider, making it something you should seriously consider, especially if your finances are already being handled by an independent accountant.
Outsourcing your payroll reduces your probability of making mistakes and subsequently receiving fines for non-compliance or paying too little tax. Fines for submitting payroll information to HMRC incorrectly can be detrimental to small businesses, with penalties ranging from as little as £400 to as much as £10,000.
While in-house payroll may cut down on costs if being managed by yourself or another employee, it’s an attractive prospect for smaller operations that don’t have the resources to build an accounting department.
Smaller businesses can be more negatively impacted by payroll-related fines and may find it harder to stay abreast of changes to regulations.
Start your payroll journey the right way
Waiting until after you’ve hired one or more employees to begin implementing payroll can cause complications and may result in missed wages or incorrect tax calculations. The sooner you integrate your payroll solution with your accounting software, the smoother your transition will be.
Don’t forget, that any data you hold about your employees is subject to GDPR regulations, meaning you must do everything in your power to keep their information safe and never share their details unlawfully. You can do this more easily by investing in software that’s fully accredited and approved by HMRC.