Logically, the basics of payroll are straightforward but unfortunately, there are various rules and thresholds which can make actually operating a payroll less so.
In calculating an employee’s pay, normally, you begin with their gross pay and then work out the deductions. After taking away all the deductions, the net pay figure is what is left owing to the employee.
Generally, (assuming the employee is earns over the threshold amounts), there is tax to deduct under (PAYE – pay as you earn), National Insurance. There may be other deductions, such as pension contributions, student loan repayments (after 1998), deductions arising from attachment of earnings order and charitable donations (this list is not exhaustive).
On top of that, an employer must pay employers national insurance contributions (generally on the gross pay, if above the threshold).
There is also national insurance contributions payable on certain benefits in kind.
The employee gets paid their net pay (gross pay less all the applicable deductions), the employer pays over the deductions to the relevant organisation. (eg. PAYE, NICs – both employees and employers NICs – and student loans to HMRC, pension contributions to the pension company and so on)
Payroll record keeping
Once a payroll is in operation, HMRC lay down certain requirements as to what records and information needs to be kept. These include:
- employees names, addresses (and their dates of birth)
- gross pay, NICs, PAYE, other deductions, net pay (keeping a copy of their payslip would normally satisfy this requirement, assuming the payslip contained all the correct and required information)
- copies of the employees’ P60
- holiday, sickness, overtime, bonuses, commission details
- value of benefits in kind and expense payments
- amounts paid over to HMRC
Other information will also be required in the event of maternity/paternity/adoption and sickness/sick pay.
In addition to records relating to payroll, you will be required to keep records relating to other matters, for example: hours worked, pensions, holidays taken, accidents. (This is not an exhaustive list by any means)
Gross Pay and Employer’s National Insurance Contributions
The cost of employing someone in your business obviously includes their basic wage or salary. It may also include various bonuses and enhancements, such as double-time for working on a Sunday or bank holiday or an attendance allowance to discourage absence through sickness. All of these items add up to the employee’s gross pay.
On top of the employee’s gross pay, an employer can expect to pay employers national insurance contributions (NICs). This is a percentage of the gross pay in excess of what is termed the “earnings threshold”
Employer’s national insurance contributions are sometimes abbreviated to ERs NICs.
Benefits in Kind
On top of their pay, you may offer your employee “perks” These might be things like a company car, clothing allowance, relocation expenses, childcare vouchers and private health insurance, to name a few.
Some of these benefits will be taxable in the hands of the employee: that is, the employee will have to pay tax on the financial benefit of these perks.
As well as bearing the actual cost of these perks, the employer may also have to pay Class 1A National Insurance Contributions on the benefit in kind that is being provided.
If you employ someone, you will also contribute to a pension scheme on behalf of your employee under “automatic enrolment”
Other Costs of Employing Staff
Once you decide to employ someone, you will need to consider a whole range of issues and costs of employing staff.
The first cost is the cost of recruiting someone suitable. There will be the obvious costs of advertising in newspapers or on the internet. Maybe you will need to hire a recruitment consultant; agencies normally charge a percentage of the new employee’s gross salary. (These may be scaled down or refunded if the employee leaves within a short timeframe).
Here are some other employee-related costs:
- “Overhead” costs of office accommodation. You will still have a certain amount of costs even if they work from home, such as phone call costs, an internet connection, travel and possible contributions to heating and lighting.
- Equipment, such as a computer/laptop; mobile phone and so on
- Depending on your business, cover for holiday, sickness and absence.
- Initial training. An employee is rarely productive from day 1.
- Ongoing training and development opportunities.
- Insurance. Employer’s liability insurance is a must.
- Payroll costs.
However, there are also ongoing costs of employing staff arising from the need to be aware of employment law and other employment issues, such as grievances and disciplinary action, maternity rights, sickness and absence management and equal opportunities, to name a few.
Register as an Employer
As soon as you take anyone on where any of the following conditions apply, you need to register as an employer with HMRC.
- the employee already has another job
- the employee receives a pension (state or occupational)
- the employee will earn at or over the PAYE (tax) threshold
- the employee will earn at or over the lower earnings threshold for National Insurance
- you are providing the employee with employee benefits.
You can register up to 4 weeks in advance.
If you are the sole employee of your own limited company and are paying yourself a wage/salary where the above conditions apply, you will need to register as an employee. In this case, you would be both an employer and an employee!
How to Register as an Employer
It is generally possible to register as an employer by telephone or email (if special circumstances apply, you may have to register via and HMRC office). Either way, you will need the following information to hand:
- general information about yourself and your company (including your national insurance number and UTR number – unique taxpayer reference number)
- information about your employees (including number of employees, date of first payment, frequency of payments)
- if a limited company, then details about the company (registration number, UTR, registered office, directors’ personal details – including their national insurance numbers and UTR)
- if a partnership, then details about the partnership (Limited liability partnership – LLP number, if applicable, partners’ personal details – including their national insurance numbers and UTR)