1. Summary of Key Points
- Operate a payroll system on any employee you pay above £97 for a week or £421 for a month.
- Make every effort to get a P45 for new joiners, and issue them to leavers.
- Issue payslips and P60s to your staff in good time.
- Choose a good payroll system – but not the HMRC one!
- Get good advice on benefits in kind if you offer them.
- Know the rules on the end of year returns – or use someone who does!
2. Background
The rules on running a PAYE and NI system are complex. This note aims to outline the key points as they relate to small employers. It is in no way intended as a comprehensive guide to running a payroll system.
3. When you must operate a payroll system
Everyone earning above the lower earnings limit is building up some sort of entitlement to UK state benefits. Therefore if you are employing someone and paying them above this limit, you must operate a payroll system for them so that HMRC have a record of their National Insurance entitlement. This is the case even if the person is only just above the limit, so that neither NI or PAYE is being deducted.
The limit is £97 per week for 2010-11, or £421 per month.
4. What records you must keep for a new joiner
It’s much better for the new starter if they have a P45 showing a record of their pay from the start of the tax year and the tax they’ve paid. If not the employer must issue them an emergency tax code and they’ll probably pay more tax as a result, until their P45 details are known.
In turn an employer has a legal obligation to issue a P45 within a month of the employee leaving.
5. Payslips and P60s
It is a legal requirement to:
- Issue a payslip to an employee on or before the date you pay an employee.
- Issue a P60 to an employee by 31 May following the end of the tax year.
6. Payroll Systems
There are many good payroll systems on the market and one terrible one – the HMRC one! Unless you have the simplest of payrolls, avoid the HMRC one at all costs as it usually has glitches in it, and it is set up purely to produce reports HMRC wants, and not even the most basic reports an employer would want to see.
A very good free system is payroo.com, and the options provided by any HMRC accredited system will also be fine.
If you have never run a payroll system before, take care if your business has:
- A high turnover of staff.
- Irregular payments from week to week and month to month.
You’re probably better off getting your accountant or book-keeper to run your payroll.
7. Benefits-In-Kind
Put simply, this is anything an employee receives from his or her employer which has – or could have – a monetary value, which does not go through the payroll system.
So vehicles, cheap loans, travel concessions, accommodation, medical bills and a whole host of other benefits fall into this area. The rules are complex – some are not taxable at all, some have both PAYE and NI, some have just PAYE, some are only taxable on certain employees.
8. End of Tax Year Forms
This is the time of year when a good payroll operator earns his or her corn. There are potentially lots of forms to submit, and deadlines to meet – or the £100 late submission fines will start to appear on the doormat. The main ones are:
P14 Due by 19 May for each employee, a summary of their pay.
P35 Due by 19 May, a summary total of the employer’s payroll.
P60 Sent to each employee by 31 May by the employer.
P11D Due by 6 July, a detailed list of benefits paid most employees.
P9D Due by 6 July, benefits paid to employees earning below £8,500.
There are also supplementary forms such as P38As for casual employees and the like.