For a business with salaried employees, effective payroll administration is a crucial part of its operational policies and procedures, for compliance with regulations that govern it, and for optimal financial positions of both the business and its employees. Some small businesses, particularly contractors, are owner-managed companies with only 1 or 2 individuals. Whatever the size and nature of the business, administering payroll effectively is necessary.
What does payroll entail?
Simply put, it is a company’s list of its employees that it pays salaries and wages to, and amounts that each employee should receive after various statutory and voluntary deductions. Its administration involves the maintenance of records, and also the process of calculating the amounts that would be paid to the stakeholders – the employees themselves and the government’s tax authorities, however there are other beneficiaries depending on the nature of the deductions and contributions on the payroll. This is done on a periodic basis, usually monthly or weekly.
The easiest document to refer to that details the main components of payroll is an employee’s payslip. Combining all of a company’s employees’ payslip will show the various payments that make up payroll. The main ones are:
- benefits (health insurance, pension, retirement plan),
- tax (discussed below), and
- national insurance (discussed below).
There are other components however, more specific to the circumstances of each employee.
Having effective policies regarding payroll presents advantages for both the employees and the businesses. The most pertinent for employees is evidence of employment and proof of income. This would be useful during credit applications such as those for mortgages or vehicle finance, to name a few. Traditionally, these types of credit applications will not be accepted unless salaried proof of income is produced, and this has often been problematic for directors/owners of most one-man companies which do not run payrolls.
Other advantages for employees centre around pension or retirement planning, where employees can afford to set aside funds on a monthly basis by way of voluntary deductions from their salaries when payroll is run. This planning can be done month on month for a number of years during employment which would accumulate more savings, rather than lumpsum savings in the last few years before retirement which could put employees under financial strain because of “panic savings”.
Taxes and national insurance contributions are paid “in advance” monthly to the tax authorities throughout the year when payroll is run in a business, which is done by way of the company withholding these from the salaries of the employees, rather than the employees receiving a full year’s tax bill if payroll is not done. This clearly reduces the tax burden at the end of the tax year.
Other specific advantages has been seen recently during the COVID-19 crisis, where in some instances applications by companies to the government for financial support would only be accepted if there was a record of payroll being run by the company, which gives evidence of taxes being paid and national insurance contributions being made.
The above examples are not exhaustive, however most will point out the advantages of paying salaries (even in cases where the company is owned and run by only 1 person) over paying in other ways, such as via dividends. Dividends are discussed in detail in a previous article at the following link: https://www.invicta-accounting.com/blog-post/dividends-easy-as-123/
Maintaining records for payroll is very good business practice, and provides for an audit trail and reference to relevant stakeholders. Payroll administration is a crucial part of the Human Resources function of a company, which is very reliant of maintenance of records in the case of any external inspections or disputes between employers and employees. An important document which is always referred to is the employment contract of an employee, which details the gross salary and the benefits they are entitled to.
From the employment contract, periodic pay runs can then be done with the necessary calculations, and other records are produced in the process which must be maintained including mainly the payslips of employees and any supporting timesheets that are recorded. The total payroll of the company for each period is recorded in what is usually referred to as the payroll summary report which shows the list of all the employees and the amounts of each component of payroll for each employee, with totals at the bottom. This report is can also be of use to the accounting function of the business for financial reporting and analysis. An example is shown below:
Tax and national insurance
Companies with salaried employees are required to register with HMRC (UK) or IOM Tax Office for the purposes of paying over tax and NIC to the relevant tax authorities. Tax and NIC is paid over by way of “advance payments” throughout the year when employees are paid, and these advance payments are withheld from the employees salaries as PAYE (UK) or Income Tax Instalment Payments – ITIP (IOM), and NIC. Employers also need to register all their employees with the authorities, usually on the respective online government platforms – HMRC Online (UK) or IOM Online Services (IOM).
The threshold salary amount that can be paid to an employee before tax is payable is £12,500 (UK) or £14,500 (IOM) per tax year for the 2020-21 tax year.
The threshold for National Insurance Contributions is £6,240 (both UK and IOM).
Over and above the employees’ NI contributions which are deducted from their gross salaries, the company also pays employers’ NI contributions as an extra company cost for all employees that receive salaries above the NI threshold.
IOM employers must also submit an Employer Annual Return (referred to as a T37), declaring the total of the ITIP and NI payments made during the year, reconciling them to the deductions made from employees’ salaries per their payslips. UK employers are usually not required to submit such a return.
As most payrolls involve computations based external sources of information e.g. tax and NI tables, the use of payroll software systems is common practice as these platforms are automatically linked to the relevant tables for more accurate calculations of the taxes and NICs due. There is less risk of human error, and the systems ensure that the latest tables are used given that these change on a yearly basis.
Below are links to the tax and NI rates and thresholds:
What can Invicta do for you?
The administration of payroll can be burdensome and requires great attention to detail as it involves complex calculations on issues that are relatively sensitive matters for a company.
At Invicta, we have processes and procedures in place to run your full payroll, and prepare the relevant documentation for your records, including payslips and payroll summary reports. We can submit the monthly PAYE or ITIP declarations and required employers’ annual returns to the relevant tax authorities, notifying you of the amounts payable and the deadlines for payment.
We have in place the most up-to-date software for use in performing full pay-run for your company which is automatically linked to the most current tax and NI tables.
Call us on 01624 672 358 or email us at firstname.lastname@example.org if you require further information.