When you own a limited company, one of the administrative and tax responsibilities you will have is setting up and managing a payroll. Even where you do not employ other people to work at your company, as a company director yourself, you are considered to be an employee. Company owners have three options when it comes to managing payroll. Many will choose to delegate this task to an in-house payroll manager, whilst others may choose to outsource it to an accountant (find out if any of these two options may be suitable for you here). However, you can also decide to run and manage the payroll yourself. If so, the answers below will be a helpful guide on getting you started.
What is payroll?
The definition of a payroll is simply a list of all employees and the wages that they are to be paid. However, the term ‘payroll’ is now more often used to describe the process of running a payroll. This not only includes ensuring employees get paid, but also means fulfilling the reporting requirements for HMRC, as well as paying the correct amount of taxes and National Insurance contributions (NIC) for both yourself as an employer and from the employees’ salaries.
What does running a payroll involve?
Although it may sound like a simple task to do when it comes to paying an employee, the reality is that there is a lot more involved to managing a payroll correctly. If you are responsible for your company’s payroll then you will need to:
- Collect information for new starters and add them onto your payroll
- Auto-enrol all employees onto a workplace pension scheme (you will also have to re-enrol employees that have previously opted-out periodically as well as re-declare that you have fulfilled your obligations with The Pension Regulator)
- Calculate net and gross pay
- Take into consideration any statutory sick pay, statutory maternity/paternity pay etc that may be applicable to an employee
- Make the correct amount of deductions from the employee’s salary including income tax, NIC, student loan repayments, workplace pension scheme contributions or any other deductions that may be imposed (such as for childcare vouchers).
- Pay employees to agreed time scales (e.g. by the 25th of each month) and issue them with payslips
- Complete reporting of employees’ pay and deductions to HMRC via RTI submissions
- Pay HMRC income taxes and NIC collected from employees’ salaries as well as pay employer’s NI
- Issue any relevant PAYE forms by relevant deadlines
- Complete annual payroll reports for HMRC
- Keep up to date records of all payroll for at least 3 years
How to set up a new payroll for the first time
Before you can begin paying employees (or even yourself a director’s salary), you will first need to register as an employer with HMRC. This must be done before the first pay day, but no more than two months prior to issuing the first payment to an employee. Bear in mind that it can take up to 5 working days to receive your employer PAYE (‘pay as you earn’) reference number and PAYE Accounts Office Reference. These are two different things, but both are required.
You will need the PAYE reference number to log into HMRC’s PAYE online system. This system must be used for payroll and allows you to:
- Check what you owe HMRC from payroll
- Pay the bill
- See your payment history
- Access tax codes and notices for your employees
- Appeal a penalty
- Receive alerts from HMRC if you report or pay late
- Send expenses and benefits returns to HMRC
What to use to run payroll
The next thing to do when setting up payroll for your limited company is to decide which software you want to use. By using payroll software, you will more easily be able to calculate pay and deductions, keep records and submit payroll information to HMRC.
HMRC provide a recommended list of free-to use payroll softwares where you have fewer than 10 employees. They also provide a separate list for paid-for softwares if the free software options are not suitable for you. It is important to only use HMRC-approved software as they have been checked by HMRC to be compliant with their requirement for real time information (RTI) reporting.
When choosing software, you need to be aware that not every product will have the functionality you may need. Consider software that will enable you to:
- Produce payslips
- Record pension deductions
- Make pension payments through the software
- Pay employees on different payment periods such as hourly, weekly or monthly
- Send an Employer Payment Summary (EPS) if this is relevant to your company
How to add an employee onto your payroll
You need to inform HMRC whenever you add a new employee onto your payroll. This also includes adding yourself as a company director to your company’s payroll. You do this by submitting their details on a Full Payment Submission (FPS) the first time you pay them.
The FPS will need to include:
- Their personal details such as name, gender, date of birth, full address, and their employment start date
- Information from their P45 (or starter checklist form if you do not have this) which contains the leaving date from their last job, the total pay and tax paid from their last job in the current tax year, student loan status, NI number and existing tax code.
- The amount of pay and deductions from their first pay since working at your limited company
You will also need to add the employee onto your payroll software. Issue the employee a payroll ID which must be completely unique, even if you are re-employing someone who previously worked for you, or if the employee has more than one job in the same PAYE scheme. For example, you may have a receptionist who also has a second job at your company as a cleaner.
When do you not need to add someone onto your payroll?
Not everyone who works for you necessarily needs to be paid through the PAYE system. You do not need to add someone onto your payroll if:
- They are a volunteer
- They are a freelancer whose services you use
- They are a temporary or agency worker who you do not pay directly
- An employee who earns less than £120 per week (but you will still need to keep records of what they have been paid)
How to run payroll
Before you are due to pay any employees, you need to enter the details of what they will be paid into your payroll software. You need to include everyone on your payroll, regardless of whether they are due to pay income tax or not. You must keep records of this, even once the payroll has been completed for that period, for a minimum of three years.
Your payroll software will be able to calculate the necessary deductions. It calculates this based on the employee’s tax code and NI category number. These details would have been originally entered from the employee’s P45 or new starter form when you registered them as an employee. This shows why it is important to use HMRC-approved software, as it will ensure it is applying the most up-to-date income tax rates and NI rates.
Next, your payroll software will calculate how much employer’s NI you need to pay for each employee. You are required to pay employer’s NI where any employee earns over £183 per week. Whilst you need to report this amount to HMRC before or by the time the employee has been paid, you do not have to make the employer’s NI payment to HMRC until the 6th of the following month but by no later than the 22nd. Where your average monthly payments of employer’s NI are under £1,500 per month, it is possible for you to opt into making quarterly payments instead.
It is a legal obligation to provide all employees with a payslip for each pay period. This can be weekly, monthly, or any other agreed timescale. Payslips need to include, at a minimum, the following information:
- Gross pay (the total salary they are entitled to before any deductions)
- The amount of deductions made (for income tax, NI, student loan repayment, workplace pension scheme contributions and anything else that can come out directly of their salary)
- The net pay (the actual amount they will receive once deductions have been made)
- The method of payment used to pay the employee
When to report payroll to HMRC
When you have fully prepared your payroll to pay employees, you must submit a payroll report to HMRC in an FPS. This is done by accessing the HMRC PAYE online system through your payroll software. The FPS must be submitted before or on the day your employees are paid.
You can submit the FPS early if needed, but you must include the regular pay date. For example, if you always pay employees on the last day of the month, but on one month this day falls on a Sunday, then it is acceptable to file on the Friday before. However, you must not report too early, or you will have to send a corrected FPS to update HMRC.
Be sure not to submit your FPS late however, as this can result in a fine for every month it is late. Companies with between 1 – 9 employees can expect a penalty of £100 per month. Fines increase to £400 per month for companies with over 250 employees. Only in limited circumstances are you able to submit a late FPS but you must put the reason on each late submission.
Annual responsibilities for payroll
Payroll responsibilities are not simply limited to the frequency of when payroll needs to be run for your company. There are annual obligations that must be fulfilled:
- The final payroll report before the end of the tax year (5 April) must be submitted to HMRC on or before your employees’ payday
- Update all employee payroll records from 6 April onwards to ensure they are on the correct tax code for the new tax year
- Update your payroll software to ensure it is applying the most up-to-date rates of income tax and NI
- Produce and provide P60 forms to all employees no later than 31 May
- Report employee expenses and benefits by 6 July
For support with setting up, running and managing your company’s payroll, see our payroll service page.