How Payroll for Small Business Owners in the UK Works
Running a business comes with a multitude of responsibilities, and one of the most crucial aspects is managing your employees' payroll.
Whether you're just starting out or have been in business for a while, understanding how payroll works in the United Kingdom is essential to ensure compliance with regulations and maintain smooth operations. Let's break it down into simpler terms, starting with the basics.
Step 1: Employing staff
Make sure that your HR provision is in place i.e. employment contracts. These are a legal requirement. We don’t do this function as an accounting firm, but we can refer you to some amazing people who do.
Step 2: Registering for PAYE
If you employ staff or wish to pay yourself as a company director, you need to run a payroll system and register for Pay As You Earn (PAYE) with HM Revenue & Customs (HMRC).
PAYE is the system used by employers to deduct tax and National Insurance Contributions (NICs) from employees' wages.
Step 3: Monthly PAYE Return
Once you're registered for PAYE, you're required to submit a monthly PAYE return to HMRC.
This return includes details of the amounts you've paid to your employees, deductions made, and any other relevant information. This can be found on the P32 report.
At Anlo, we sent this report to you on a monthly basis. If you have any questions regarding this report, please don’t hesitate to contact us.
Step 4: Understanding PAYE and National Insurance
PAYE and NICs are payable on the monthly amount you pay to your employees. These contributions go towards funding various state benefits, including the state pension, statutory sick pay, and maternity pay.
PAYE is the tax portion, and this is what is used by HMRC to calculate the tax code that an employee will be on. National Insurance is a percentage of the gross monthly amount and both the employee and the employer pays towards this.
Step 5: Using a Payroll System
Managing payroll manually can be complex and time-consuming, therefore many businesses opt to use payroll software like Xero payroll, which simplifies the process and ensures accuracy in calculations.
These systems often integrate seamlessly with accounting software, making financial management more efficient. It also decreases the monthly reconciliation and journals we have to do as your accountant to make sure your accounting records are 100% correct.
Step 6: Tax Calculation
The payroll system calculates the tax due based on the tax codes provided by HMRC.
Tax codes are unique to each employee and are used to determine how much tax should be deducted from their wages based on their income and personal circumstances.
The employer does not determine this tax code, and it is provided by HMRC or the employee based on their last employment(P45)
Step 7: Payment Deadlines
Once the tax and NICs have been calculated, they need to be paid over to HMRC. The deadline for payment is the 22nd of each month (or the 19th if paying by postal methods).
Missing these deadlines can result in penalties, so it's essential to stay on top of your obligations.
In the UK, if you're a small employer, you might be eligible to pay HM Revenue & Customs (HMRC) every three months through the PAYE scheme.
This option is known as quarterly PAYE payments and is available to businesses with a low annual PAYE and National Insurance liability.
To qualify for quarterly payments, you typically need to meet certain criteria set by HMRC. These criteria might include:
Low PAYE and NICs liability: Your average monthly liability must be £1,500 or less to qualify for quarterly payments instead of paying monthly. This means that your total annual liability must be £4,500 or less for your business to qualify for a quarterly payment of PAYE and NIC. We don’t suggest paying quarterly, but paying this monthly to make sure you stay up to date.
Being up to date with your payments: You must be up to date with your payments and filings with HMRC to qualify for quarterly payments. This includes making sure you've submitted all previous PAYE returns and paid any outstanding amounts.
Not having any penalties: You should not have incurred any penalties from HMRC in the previous tax year.
If you meet these criteria, you can apply to pay HMRC quarterly instead of monthly. This can help with cash flow management, as you'll have longer intervals between payments.
However, it's essential to stay organised and ensure you have enough funds set aside to cover your quarterly liabilities.
If you want to apply for quarterly PAYE payments, you can do so through your HMRC online account or by contacting HMRC directly. They will review your eligibility and inform you of their decision.
Remember, if your circumstances change or if you no longer meet the criteria for quarterly payments, you may need to revert to monthly payments. It's crucial to keep HMRC informed of any changes to avoid penalties or interest charges.
Tax Relief for Employers:
As of the 2023/2024 tax year, the Employment Allowance in the United Kingdom remains a valuable incentive for businesses to reduce their National Insurance Contributions (NICs) bill.
Here's a summary of the updated details:
Eligibility: Most businesses and charities that pay Class 1 National Insurance contributions on their employees' or directors' earnings are eligible for Employment Allowance.
Claiming: Eligible businesses can claim Employment Allowance through their payroll software. Once claimed, the allowance will automatically be offset against their employer NICs liability each pay period until it's used up or the tax year ends.
Amount: The Employment Allowance provides relief of up to a certain amount each tax year. As of the latest update for the 2023/2024 tax year, eligible employers can claim up to £5,000 off their employer NICs liability. It's important to note that this amount may be subject to change in future tax years due to updates in legislation.
Usage: The allowance can be used to reduce the amount of employer NICs due, but it cannot be used to reduce other types of National Insurance contributions such as Class 1A or Class 1B.
Exclusions: Some businesses are not eligible for Employment Allowance. This includes single-director companies where the director is the only employee paid above the Secondary Threshold, businesses where the sole employee is a domestic worker, and public bodies and businesses doing more than half their work in the public sector.
Submission: Employers must report their use of Employment Allowance in their Real Time Information (RTI) submissions to HM Revenue & Customs (HMRC).
Confirmation: After claiming, HMRC will confirm the allowance and adjust the employer's NICs liability accordingly.
The Employment Allowance continues to provide businesses with an opportunity to reduce their NICs liability, thereby freeing up funds for investment and growth. However, it's essential for businesses to stay informed about eligibility criteria and any changes in legislation to ensure compliance.
End of year reports
After the end of the tax year (March of each year), the employer must provide the employees with a P60 from the payroll system.
Benefit in kind
A Benefit in Kind (BIK) refers to any non-cash benefit that an employee or director receives from their employment in addition to their salary or wages.
These benefits can include things like company cars, private medical insurance, housing, low-interest loans, and more. The value of these benefits is determined by HM Revenue & Customs (HMRC) and is subject to taxation.
1) Reporting Requirements to HMRC: Employers are required to report any benefits-in-kind provided to employees or directors to HMRC. This typically involves completing a P11D form, which details the cash equivalents of the benefits provided.
The deadline for submitting P11D forms to HMRC is July 6th following the end of the tax year (which runs from April 6th to April 5th the following year).
Additionally, employers must also submit a P11D(b) form, which summarises the total taxable value of all benefits provided and any Class 1A National Insurance contributions due. This form is also due by July 6th.
2) Tax Payable on Benefit in Kind Value: The value of benefits-in-kind is subject to income tax and Class 1A National Insurance contributions (NICs).
The tax liability for employees is calculated based on the cash equivalent value of the benefits provided. Employers are responsible for paying Class 1A NICs, which are calculated at the current rate (as determined by HMRC) on the total value of benefits provided to employees.
It's important for employers to accurately report and calculate the value of benefits-in-kind to ensure compliance with HMRC regulations. Failure to report benefits-in-kind or pay the appropriate tax and NICs can result in penalties and interest charges.
Benefit in Kind refers to non-cash benefits provided to employees or directors, which are subject to taxation in the UK. Employers must report these benefits to HMRC using P11D forms and pay any associated income tax and Class 1A NICs.
Auto-enrolment:
Auto-enrolment pensions are part of a government initiative designed to help more people save for their retirement.
As an employer, if you have eligible employees, you are required to automatically enrol them into a qualifying workplace pension scheme and make contributions towards their pension savings.
Here are the reporting requirements for employers regarding auto-enrolment pensions:
Provide Information to Employees: Employers must provide certain information to their employees about auto-enrolment, including details about the pension scheme being used, the contributions being made, and how auto-enrolment affects their employment.
This information should be provided in writing and given to employees within specific time frames outlined by The Pensions Regulator.
Auto-Enrol Eligible Employees: Employers must assess their workforce to determine who is eligible for auto-enrolment into a workplace pension scheme.
Eligible employees are those who are aged between 22 and the state pension age, earn over a certain amount (£10,000 per year for the 2023/2024 tax year), and work in the UK. Once identified, eligible employees must be automatically enrolled into the pension scheme.
Enrolment Declaration to The Pensions Regulator: Employers are required to complete a declaration of compliance with The Pensions Regulator.
This declaration confirms that the employer has met their duties for auto-enrolment and is compliant with pension regulations.
The deadline for completing the declaration varies depending on the size of the employer's workforce and the date auto-enrolment duties commenced.
Contribute to the Pension Scheme: Employers must make contributions to their employees' pension schemes as outlined by pension regulations.
These contributions are typically a percentage of the employee's qualifying earnings, with minimum contribution rates set by law.
The employer's contributions must be calculated accurately and paid into the pension scheme by the specified deadlines.
Maintain Records: Employers must keep accurate records relating to their auto-enrolment pension scheme, including details of employee contributions, communications sent to employees, and any opt-out requests received.
These records should be kept for a minimum of six years and be readily available for inspection by The Pensions Regulator if required.
At Anlo, we don’t maintain pension regulations for employers. This is the director's responsibility.
If the employer is registered for auto-enrolment, we will submit the pensions to the pension provider on a monthly basis from the payroll system. But we are not pension specialists.
Failure to comply with auto-enrolment duties can result in financial penalties and enforcement action by The Pensions Regulator. Therefore, it's crucial for employers to understand and fulfil their reporting requirements accurately and on time.
In conclusion…
Navigating payroll responsibilities as a small business owner in the UK can seem like a daunting task, but breaking it down into manageable steps is key to ensuring compliance and smooth operations.
From employing staff and registering for PAYE, to understanding tax calculations and payment deadlines, each aspect plays a crucial role in maintaining financial integrity and legal adherence.
Utilising payroll systems like Xero and staying informed about updates such as Employment Allowance and auto-enrolment pensions are essential for efficient management.
At Anlo, we understand the complexities of payroll and are here to support you every step of the way. If you have any questions or concerns about managing payroll for your business, please don't hesitate to reach out to us for assistance.