I’m gone through the basics of payroll and the PAYE system and just that little bit more.
Now, if I was to explain what payroll actually means, I’m going to use five simple steps here.
Calculate and report GROSS employee:
Process in order to calculated and report an employee or employees pay.
Calculate employees’ deductions:
It is to actually then calculate and report on their deductions.
Namely tax and national insurance.
Calculate employers’ deductions:
It is to report on the employer’s national insurance. This is what business owners or directors of the company have to pay in terms of national insurance.
Produce and send a pay slip:
It is produced and send your employees pay slip on a regular basis. Most often Monthly.
It is report all of this to HMRC again on a regular frequency quite often, monthly.
Now the first consideration in particular, if you’re a director, entrepreneur, freelancer or business owner, is how often and for what periods payroll needs to be run for.
Now, you may be running payroll for yourself as a director salary or a business owner salary, or you may be doing it for your employees. But the crucial thing here is you’ve got to understand what a tax periods is, now in terms of payroll and the PAYE your system, that tax period differs from a calendar month.
For Example,
Calendar Month
1st Jan – 31ST Jan
Tax Period
6th Jan – 5th Feb
if you’re paying your employee 2,000 pounds in the month of January, and your intention is to pay them from the 1st of January to the 31st of January for services procured in that period, the tax period does not marry that the tax period actually runs from the sixth of the month to the fifth of the month.
So, in this example, the tax code period is the sixth of January to fifth of February. And that’s how the PAYE system works. And also, the other key thing is regular practices that payroll and the PAYE system is run on a monthly basis. And that’s pretty normal practice, but contrary to belief, it does not mean that that’s what you have to do.
You can actually run payroll weekly. It can be done daily. But it also can be done yearly, semiannually, biannually. So actually, there’s no defined period, but the key here is you want to keep it neat and tidy, normally doing it monthly, keeps it tidy, and your employees are happy if you’re doing it on a weekly basis, that’s all well and good, but that does increase your administration.
If you’re doing it any less frequently than that, then these are rare circumstances.
Now, in order to run payroll, if you’re an employer, business owner, freelance and director is you’re going to need two vital bits of information.
PAYE reference number
That is PAYE reference number and
Accounts Office reference number
And This is accounts office reference number.
Now, what exactly are these?
Well, your PAYE reference number is obtainable from HMRC. And this is your unique reference number for your particular business. No matter how many people you employ, including yourself, this is reference number has to be on every single piece that can return to HMRC.
The accounts office reference number actually indicates what accounts office your business payroll is linked to at HMRC.
So, this brings me on quite nicely to tax codes. Now, if for an employee or even an employer, what you may notice on pay slip is a field called tax code. And quite often it consists of four-digit numbers and a letter.
Now I’m going to give you an example here. Most common tax code used in this current tax year, which is a 20 to 21 tax year is 1250L here in the UK.
But what exactly does that mean?
Well, let’s break it down the first four digits 1250 signifies the level of your personal allowance I.e., the tax-free amount that you can earn in the year without paying any tax of course, 1250 signifies 12,500 per annum.
The letter that follows it signifies the level of personal allowance or whether there’s a different variation.
So, for example, the L simply means you’re entitled to a standard personal allowance. If you had an M after it, it means you’re then entitled to not only just a standard allowance, but the marriage allowances as well and so on. And there are various letters that can be added to the four digits.
Now time permits me to go through each and every one here. But if you follow the link below in the description, it will take you to the Account Ease where it will list out all the different tax code letters.
And one of the things you may want to do is just check that you have the correct tax code, because if it is incorrect, you may just be paying more tax than actually you should be.
Now on this article what I’m showing you here is a classic example of a pay slip, and l it’s just dissect this and go through this very carefully.
Now you can see a couple of fields that I have already explained previously.
Number one, it’s a tax code, and there is quite clearly also the PAYE reference number and the accounts office reference number two there is also fields of the name and national insurance number of the particular employee. And you can also see two additional fields, one called tax period, and the other one called the payment date.
Now the tax period is what I explained earlier. It runs from the sixth to the fifth of every month. And that’s how tax is calculated in terms of deduction on this pay slip and every single other pay slip.
Whereas the payment date is the actual date that you intend and probably will pay your employees or yourself. And that can differ from the tax date. And you can see in this article that the payment date is the 31st of May, 2020.
Now that is the day the employee got paid. And that is a day HMRC were notified about this pay slip and more than likely, this pay slip will be sent out to the employee. And that brings me on to the dreaded deductions. Now, the common deduction, as you can see from this pay slip is tax and national insurance.
Now, as I mentioned previously, it’s really important to double check that you’ve got the right tax code so the right amount of tax has been deducted on a monthly basis. And national insurance is what’s called class one employees’ national insurance, that is the national insurance related to employees. And what determines the amount of national insurance you get deducted is based on a category letter.
The most common is a and again, I’II put a link in the description below that explain all the different categories and whether you are being deducted the correct amount of national insurance, but is it does not stop there.
There are various other deductions that can be made through your pay slip and through your gross salary, student loan deductions, pensions, charitable giving, child maintenance payments are just a few that can actually be deducted directly from your pay slip. And once all the deductions are made, you get to what’s called a net paid figure, and that net pay is what physically gets paid to your employee. Or if you are a director freelance entrepreneur, and you are paying yourself to you.
Now, the question is how can you run payroll and issue pay slip on a frequent basis?
Well, there’s a plethora of different pieces of accounting software out there that you can possibly use. And also, HMRC developed their own unique software, which you can also use.
However, I Must warn it is a little bit clunky. So, if you are running payroll monthly, what you have got to decide is the payment date. And it’s the payment date on which you need to issue the pay slip, make sure payment is made and report to HMRC using the RTR return system that is Real Time Returns. And when you report HMRC, there are two types of returns that can be made.
One is Full Payment Submission is called an FPS and the other is Employers Payment Submission is called an EPS.
Now, let me just focus on the FPS to begin with. So, an FPS is what’s called a full payment submission.
This is where quite often you are paying your employees a significant amount, normally over 120 pounds a week. And by making the submission, it goes into a lot of details and HMRC receive all of this and it must be done monthly. But the one thing to be aware of is late submissions.
You’ve got to be very, very careful here. If you make a submission on or before the payment date, you are absolutely fine as long as it’s before the end of the tax month. But if you are late in doing that, then you will more than likely get subject to quite a hefty fine, and they can be up to 400 pounds.
There are very few circumstances in which HMRC will be lenient with late submissions. And if they’re done frequently then you’ are really going to get into a lot of hot water. So, the other type of return is what’s called EPS. That’s an employer payment summary. Now this doesn’t have to be done every month.
So, once you have made your FPS or EPS submission to HMRC through your software, then you have got to ensure that they get their payment, their tax and national insurance payments, and must be made by the 19th or if you are doing your online the 22nd of the month following the tax month, now that’s big confusing.
Let me break it down. Let’s say,
for example,
Tax Period – 6th January to 5th February
Your tax month is the sixth January to the fifth of February.
Pay slip Date – 31st January
Now you have made the return on the 31st of January, because that’s the day you paid your employees, not a problem.
Then you have got some tax and national insurance to pay HMRC.
Pay HMRC by – 22nd February (latest)
Well, you have got to make sure you get that paid by the 22nd of February at the latest it’s got to reach their bank account. They normally say the 19th, but you have got till the 22nd.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
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