An efficient payroll system is essential to ensure your employees are paid on time and their salaries are correctly calculated.

This guide looks at what payroll involves, the records you need to keep, how to choose the right system for your company, and where you can go for further advice and help.

What does payroll involve?

Payroll is the system whereby employers work out their employees’ salaries and make the correct deductions from their pay. An employer is obliged by law to deduct tax, National Insurance contributions and certain other items from his or her employees’ salaries. The amount deducted depends on a number of factors, not least any changes to taxation made in the Budget each year. Deductions are worked out using complex tax tables provided by the Inland Revenue. Increasingly though, businesses use a variety of options to take the hard work out of the job.

In addition to taxes, an employer may need to alter the employee’s wages if they are entitled to certain taxable benefits (such as a company car) or are due, for example, sickness benefit, maternity pay or have a pension deducted directly from their salary. Even student loan repayments now have to be deducted from pay. The Government is increasingly reliant on employers to act as tax collectors.

Under the Employment Protection (Consolidation) Act, every employee has the right to be told how his or her pay has been calculated. In practice, this means each employee must be given a payslip showing details of their gross salary, the amount of each deduction and what it is for, and their net salary.

What records must an employer keep?

Employers are required by law to keep certain records relating to their employees. Failure to do so could result in a fine.

There is a good new employers’ starter pack available from the Inland Revenue that outlines many of the requirements, and provides some of the forms too.

Employers are required to:

• Notify the Inland Revenue each time a new employee starts or leaves work, using a form P45.
  
• Work out and deduct PAYE income tax and National Insurance Contributions every pay day.
  
• Record details of these deductions every pay day on form P11.
  
• Pay the deducted amounts to the Inland Revenue.
  
• Deduct student loan deductions and stakeholder pension contributions each pay day.
  
• Make payments of tax credits, statutory sick pay, statutory maternity pay, statutory paternity/adoption pay when necessary.
  
• Submit full deduction details at the end of the tax year (April 5) using forms P14 and P35.
  
• Give each employee a record of their pay and deductions at the end of the tax year using a P60.

The main forms to complete:

• The P11 Deductions Working Sheet is what you use to work out and record all the income tax and National Insurance deductions you make from the wages of each employee. In order to work out how much to deduct, you need your employee’s tax code and a set of tax and National Insurance tables.
  
• The P32 Employer’s Payment Record is where you keep a detailed record of the total payments you make to the Inland Revenue for each pay period. You will need this information to fill in your annual P35 return.

At the end of every tax year, you must send the Inland Revenue a summary of the business’s employment records. These will include:

• A P14 for every employee – a summing up of the figures entered on each employee’s P11. The employee has to be issued a copy of the information contained on the P14 on a special employee version referred to as the P60.
  
• Form P35 – a summary of income tax and National Insurance contributions deducted from employees’ salaries. It also summarises all Statutory Sick Pay and Statutory Maternity Pay recovered by the employer.
  
• It is now possible to use the Internet to send returns to the Inland Revenue. Further information is available from the Inland Revenue’s Electronic Business Unit.

It is worth noting that, by 2010, all employers will have to file their end-of-year returns electronically, so you may want to start now!

What other legal obligations should I know about?

Employers must, by law, keep all payroll documentation for at least three years after the tax year to which it relates. So some system of filing and retaining records is necessary.

If, as the employer, you are storing information about individuals on computers, you need to be aware that this data is covered by the Data Protection Act (1998) (DPA). For further information and to find out whether you need to have a DPA registration, we recommend that you contact the Information Commissioner, telephone number 01625 545745.

It is also worth noting that, under the Employment Protection (Consolidation) Act, employers must give every employee a contract of employment. The contract should include such things as the rate of pay, hours of work, holiday entitlement and holiday pay, notice period, terms and conditions relating to pensions, and terms and conditions relating to sickness or injury.

If you employ five or more employees, including owner-directors, you will have to offer a stakeholder pension scheme to your staff.

As an employer, you also need to have a working knowledge of employees’ rights, working time directives and working hours rules, minimum wage rates and rules, and equal opportunities.

Payment methods

There are various methods for paying employees including cash, cheque or an electronic transfer directly into the employee’s bank account. Few employers choose cash, as it can be an administrative nightmare and a security threat. Cheques are preferable, but again, there are disadvantages – not least the fact that employees have to wait several days for the cheque to clear through the banking system.

The quickest and most secure method of payment involves an electronic transfer directly into the employee’s bank account. Banks can advise you on how to go about setting this up. Many now offer software, which allows you to transmit the payment data to the bank over the Internet.

What are the alternatives to a manual payroll system?

Payroll software

There are many good payroll software programs available, which can take some of the stress out of the process. Using software reduces the amount of time spent by automating repetitive tasks. Payslips are produced automatically, you no longer have to battle with those calculations involving tax and NI tables, and even statutory sick pay and other payments should be calculated by the software. You should also be able to generate automatically the information required for your end-of-year returns.

Shop around for the best software for your company by considering the following:

• Ensure the supplier will regularly update you on the latest changes in legislation and in tax and National Insurance rates.
  
• Make sure the software can meet any specific requirements of your payroll.
  
• Check that the program allows you easily to input people joining and leaving the company.
  
• Find out if the program can handle end-of-year reports.
  
• Ensure the program allows you to change employee’s pay details and calculate such items as one-off payments or bonuses.
  
• Check that the software complies with Inland Revenue Payroll Standards accreditation.

Remember that any payroll software will require an annual license fee to be paid to keep it up to date, and also special stationery may need to be used, which could cost extra.

Outsourcing your payroll

Some employers prefer to outsource their payroll system using payroll service companies, or there are various bureaux and agents that can do payroll.

Payroll service companies

There are many payroll service companies that offer business payroll expertise in providing fully-qualified payroll managers to administer to the needs of your business. These usually have all of the automatic links required with the banks and the Inland Revenue (for the submission of end-of-year returns).

Only limited payroll knowledge is then required by the employer, as much of the burden is taken away from you by these qualified suppliers. They take care of any statutory obligations as and when they change, without you having to process manual system updates. Security sealed payslips and comprehensive management reports are also supplied as a rule.

Do bear in mind, however, that even if somebody else is running the payroll function for you, as with the operation of payroll software, the application of the PAYE and NICS system remains your legal responsibility.

Payroll bureaux

There are several payroll bureaux that allow you the control of running your own payroll system without needing to have the technical infrastructure and logistics in place. Comprehensive payroll knowledge is required to ensure that you enter the employee data correctly so that the calculations can be compliant and accurate. Many of these systems are driven by a coding structure that requires a certain amount of training before they can be used.

Real stories

Payroll software

AGP (UK) Ltd, a utilities broker, is delighted with the payroll software it uses. Accounts Manager Colleen Wallbridge tells us: ‘Producing pay-slips for 12 employees only takes me a few minutes, which is a fraction of the time I would need to set aside to do the same job manually.’ When asked how long it would take her to manually produce yearly reports (such as P14/60s and P35s), Colleen quickly responds: ‘I dread to think!’ Following a period of rapid growth, Colleen has now upgraded her version of Payroll to allow her to cater for up to 100 employees.

Payroll service company

Lee Choules is personnel and administration manager for GPW, a supplier of mobile phones direct to the public. He says, ‘Joining the service was very simple. We had some discussions with the sales team over the phone, and then a pack arrived through the post for me to sign and set up the payroll. It was all so straightforward that I was up and live running within a few days, without any need to meet in person. The helpline is excellent if I have any queries, but the service takes care of so much that there is very little for me to do.

‘As a small but developing business, we found that this takes away all the worry of payroll, leaving us free to make a success of our business.’

Useful contacts

Inland Revenue Employer’s Helpline

T: 08457 143 143

Inland Revenue New Employer’s Helpline

T: 0845 6070143
W: www.hmrc.gov.uk/employers

Inland Revenue Online Services Helpdesk

T: 08456 055 999
E: helpdesk@ir-efile.gov.uk

Tax Credits Helpline

T: 0845 300 3900

Business Link

T: 0845 600 9006
W: www.businesslink.gov.uk

The Institute for the Management of Information Systems runs a payroll software accreditation scheme, in line with Inland Revenue standards. For a list of accredited products, call:

T: 0700 00 23456
W: www.imis.org.uk

Information Commissioner

T: 01625 545 745
W: www.dataprotection.gov.uk

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