What is PAYE in the UK?
PAYE is an acronym that stands for ‘Pay As You Earn’ and relates to the way that most employees pay their tax. If you are self-employed or run your own business, you will submit your own tax returns once a year. If you are employed, tax (as well as any National Insurance and other repayments) will be deducted directly from your salary by your employer, making payments easier to understand and pay.
The amount of PAYE will depend on how much you earn, and your employer will split payments equally over the year.
How do you set-up payroll with the HM Revenue and Customs (HMRC) in the UK?
If you run a business and decide to run your own payroll service, there are several tasks that need to complete before you can pay employees:
- Decide when and how often you wish to pay employees and make sure this is agreed in their contracts.
- Register as an employer with the HM Revenue and Customs (HMRC) service and set up a login for PAYE Online.
- Choose payroll software to keep a record of employee’s details, calculate their pay and any deductions (including tax), and report these details directly to HMRC.
- You will need to set up a system of recording exactly what you pay to whom as well as any deductions you’ve made from their pay. This will be submitted to HMRC for verification.
On top of this, you will need to tell HMRC every time you hire a new employer and provide them with details such as National Insurance numbers.
How do you manage PAYE and store such payroll records?
Payroll records can be kept in any form (including paper and spreadsheets) but the most efficient way to store them is in a dedicated software application that performs many of the laborious tasks associated with payroll automatically.
A good payroll software will hold the details of the employer, including tax codes and hourly rates, and will work out their pay (and any deductions) automatically based on the number of hours they work. It will then be able to process any reports required by HMRC and may even interface with them directly.
Can payroll be manually processed? Any disadvantages?
Yes, payroll can be manually processed but it is a time-consuming task prone to error. Here are some other disadvantages:
- Has poor scalability and becomes more difficult and time consuming the more employees you have.
- Has no provision for real-time reporting or analytics and analyzing data often has to be done manually.
- Errors in processing can be at best inconvenient and at worst disastrous leading to under or overpayments and tax or pension errors. Finding them can be difficult too.
When should payroll be processed for employees?
The payroll process can start at any time and employee data will be collected throughout the month. The actual running of payroll (if done by software) usually takes place on the day that employees are paid. If this falls at a weekend or bank holiday, this is normally brought forward to the last working day before the normal pay date.
What are the components of a payroll?
Payroll is the administration of your employees’ salaries and will consist of many different pieces of information, including:
- employee name or ID
- the date they became an employee
- hours they worked in this period
- hourly salary
- any allowances
- overtime worked
- bonus pay
- sick days
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