PAYE and Payroll for Employers
Date Published: July 4th, 2019

Introduction to PAYE

The system used by HM Revenue and Customs (HMRC) to collect National Insurance and Income Tax is referred to as Pay-as-you-earn (PAYE). An employer is expected to operate pay-as-you-earn as part of an employee’s payroll. When employing a staff in the beginning, there are 7 things that need to be considered:-

  1. Decide on the wage/salary to be paid to an employee –an employee must be paid the National Minimum Wage. National Minimum Wage depends upon the age of an employee and if he/she is an apprentice. As a basic rule, an individual must be school leaving age in order to receive National Minimum Wage. Below mentioned are the prevailing rates for National Minimum Wage-

     

    Current Rates

    The following rates are applicable for National Minimum Wage – naturally, these rates are amended every April

    Year Age equal to or greater than 25 Age between 21 and 24 Age between 18 and 20 Age below 18 Apprentice
    April 2019 £8.21 £7.70 £6.15 £4.35 £3.90

    Previous Rates

    The below mentioned rates provide information from April 2016 until March 2019

    Year Age equal to or greater than 25 Age between 21 and 24 Age between 18 and 20 Age below 18 Apprentice
    For the period of April 2018 to March 2019 £7.83 £7.38 £5.90 £4.20 £3.70
    For the period of April 2017 to March 2018 £7.50 £7.05 £5.60 £4.05 £3.50
    For the period of October 2016 to March 2017 £7.20 £6.95 £5.55 £4.00 £3.40
    For the period of April 2016 to September 2016 £7.20 £6.70 £5.30 £3.87 £3.30
  2. Verify if an individual has the lawful permission to work/take up a job in the United Kingdom. An employer must check the job applicant’s eligibility to work in the United Kingdom. Documents and parameters to be checked include the following –
    • Verify an applicant’s original official papers and ensure validity of the document’s produced by an applicant
    • Keep a copy/Xerox of the documents produced by an applicant and keep a track of the date when the check was made
    • Documents must be original, real and not altered, and belonging to the individual who has submitted them
    • The dates for the applicant’s work permit, in the United Kingdom, should not have expired
    • Photos should be the same across all official papers and must look like the candidate
    • Date of birth should be similar across all official papers
    • Right to perform the job offered to him/her. This includes any restriction on the number of hours an individual can work
    • In case 2 official papers have different names, an applicant must provide supporting documents highlighting why it’s different, such as a marriage document or divorce verdict.

    Additionally, take a copy of the official papers and ensure:

    • The copy cannot be altered, for instance, a Xerox or photocopy
    • Ensure that the copy can be read clearly
    • In case of a passport, take a copy of the expiry date and applicant’s specifics (for instance date of birth, nationality, and photograph) comprising authorisations, for instance a work visa
    • Make a copy of both sides of a residence card and a bio-metric residence permit
    • Keep a record of the copies during an applicant’s service period and maintain it for a period of 2 years after they leave the organisation
    • Record the date when the verification was made
  3. Check if there is a necessity to apply for a Disclosure and Barring Service (DBS) check (previously referred to as a Criminal Records Bureau (CRB) check). Employers can authenticate the criminal record of an applicant if he/she is hired for a role that requires verification, for instance, childcare or healthcare, security, or vulnerable people. An employer can check for the following information –
    • A basic verification, which demonstrates unspent verdicts and provisional cautiousness
    • A standard verification, which demonstrates unspent and spent verdicts, risk avoidance, and final warnings
    • An enhanced verification, which demonstrates the identical steps as a standard check, along with, any statistics held by local constabularies that’s considered significant to the role
    • An enhanced verification with barred records, which demonstrate the same as an enhanced verification, along with, whether the applicant is on the record of individuals barred from undertaking a role
  4. Apply for an employment insurance – an individual must have an employers’ liability (EL) insurance once he/she becomes an employer. The policy must cover an employer for a minimum of £5 million and should be from an accredited insurer. An employers’ liability insurance can assist an employer to pay compensation if a member of the staff becomes ill or is injured during the course of work they do for an employer. An employer can be fined £1,000 if he/she is not able to display the employers’ liability certificate or declines to make it accessible to inspectors when they probe.
  5. An employer must give the employees a written declaration of employment if he/she is hiring an individual for more than 1 month.
  6. An employer must register and inform HM Revenue and Customs (HMRC) – this can be done 4 weeks prior to paying a staff member.
  7. Check if automatic enrolment of workforce into a workplace pension scheme is required.

Payments and deductions

While paying an employee through payroll, an individual will be required to make deductions for pay-as-you-earn. Payments made to an employee take account of their wages or salary, along with bonuses or tips, or statutory illness or maternity pay. Other payments that can form part of the normal pay encompass:

  • Bonus or tip (depending on the industry)
  • Incentives or commission
  • Disbursements for the amount of time spent by an employee travelling for official purpose
  • Pay for holiday (unless an employer pays it as an early payment or uses a holiday pay structure)
  • Passenger payments, except for the initial 5 pence for each mile
  • Medical suspension disbursements, provided to an employee who has been suspended for medical reasons
  • Maternity suspension disbursements, provided to an employee for her, or her child’s, health
  • Guarantee payments, offered to an employee for the period they do not work (this is separate from paid holiday)
  • Office holders’ payments (honoraria), offered to employees for carrying out services, for instance being an organisation’s sports-club secretary.

Choose how to run payroll?

An employer can either operate PAYE by paying a payroll provider to handle the account or deploy a payroll software or a cloud-base payroll software to process the payroll. If an employer appoints a payroll provider, he/she will be required to collect and keep a detailed record of all employees, and share the same with the payroll provider. However, certain payroll providers may offer additional support, for instance, providing payslips, keeping employee records, and making payments to HMRC

On the other hand, if an employer decides to operate the payroll process through a payroll software, he/she will be required to complete certain mandatory tasks such as registering as an employer and informing the HMRC about the same. Online reporting exemptions include the following (an employer may be exempted from reporting payroll online in case):

  • He/she is not permitted to operate a computer on religious basis
  • He/she is getting support services or care for himself/herself or for a family member
  • He/she cannot share reports by electronic means because the individual is disabled, aged or unable to access the internet.

Setting up payroll

If an employer is operating the payroll through a software, he/she will be required to finish certain tasks in order to make the first time payment to an employee. Below mentioned are the necessary steps:

  • Register with HMRC as an employer and receive a login for pay-as-you-earn online
  • Select the payroll software to record employee’s particulars, compute pay and deductions, and notify to HMRC
  • Pull together and save records
  • Information HMRC about the employees in the organisation
  • Keep a track of the pay, deductions and notify HMRC on or prior to the initial payday
  • Process and pay the correct National Insurance and tax to HMRC

Keeping records

An employer must gather, maintain, and save records of:

  • Amount paid to the employees and the deductions made
  • Information about an employee’s leave of absence and illness absence
  • Official documents and payments made to HM Revenue and Customs (HMRC)
  • Payroll Giving Scheme official papers, comprising of the agency agreement and employee consent forms
  • Taxable benefits and expenses
  • Tax code notices

The records must be kept for 3 years from the tax year they are pertaining to. In case the records aren’t kept, HMRC may forecast the payable amount and charge penalty of up to £3,000. Additionally, an employer must immediately notify the HMRC if the records go missing and cannot be replaced.

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