Payroll

Small business owners have many questions about the different aspects of payroll, and we have answered many of them for you here. We look at how to get started and set up a payroll system and answer common questions about the PAYE system, payslips, and how to deduct National Insurance and income tax. Questions about forms like the P60, or how to deduct student loan repayments are all answered here by our professional small business accountants.


How do I set up a payroll department?

You will need to set up your own payroll department if you decide you want to pay yourself a salary and/or want to employ personnel.

There are two options: you either use a payroll provider or you do it yourself using payroll software.

The lower risk option is using a payroll provider. You will need to select a suitable firm or bureau but once selected there is no need to train staff or select software.

The alternative, more time-consuming option, is using payroll software yourself. You will need to register as an employer, select payroll software and ensure whoever is responsible for processing the payroll is adequately trained. The person involved should not only know how to operate the payroll software, but needs to be fully aware of the reporting requirements to both HMRC and employees.


What is PAYE?

PAYE stands for Pay As You Earn. It is the system whereby employers withhold the tax and national insurance you owe on your earnings and pay it directly to HMRC.


When should I register for PAYE?

You need to start registering for PAYE as soon as you intend to start paying yourself or your employees. It can take up to two weeks to register and you must be registered by the first payday.


What should a payslip contain?

A payslip should contain the following:

  • Gross pay (i.e. pay before any deductions, such as tax and National Insurance).
  • Tax deducted.
  • National Insurance deducted.
  • Other deductions e.g. student loan repayments.
  • Net pay (i.e. pay after all deductions).
  • How it will be paid.

What are the rates for the National Minimum Wage?

The National Minimum Wage rates are revised annually in April.

  Apprentice Under 18 18 to 20 21 to 24 25 & Over
From April ‘17 £3.50 £4.05 £5.60 £7.05 £7.50

 

Apprentice rate applies if you are under 19, or over 19 and in the first year of your apprenticeship. Apprentices are paid minimum wage if they are over 19 and they have completed their first year.


How do I calculate a staff member’s income tax?

The first £11,500 is tax free, this is called the Personal Allowance. Any earnings over £11,500 up to £45,000 are taxed at 20%. Earnings over £45,000 and up to £150,000 are taxed at 40%. Earnings over £150,000 are taxed at £45%.

Don’t forget that the employee must also pay National Insurance.

Employees

  • 12% on earnings above £157 per week, up to £866 per week.
  • 2% on earnings above £866 per week.

What is National Insurance?

National Insurance is tax paid by employers, employees, and the self-employed. It funds state pensions, sick pay, unemployment benefits, maternity allowance and bereavement benefits.

Class 1 – Paid by employees earning more than £157 per week.

Class 1A and 1B – Paid by employers on employee expenses and benefits.

Class 2 – Paid by self-employed people earning over £6,025 per year. You can make voluntary contributions if you wish.

Class 3 – If you have gaps in your National Insurance record, you can pay Class 3 voluntary contributions.

Class 3A – A voluntary single lump sum to top up your pension.

Class 4 – For self-employed people earning over £8,164 per year.


When should a business pay National Insurance?

A business should pay both employers and employees National Insurance on wages and salaries above the threshold (figures shown below are for the 17-18 tax year).

Employees

  • 12% on earnings above £157 per week, up to £866 per week.
  • 2% on earnings above £866 per week.

Employers

  • 13.8% on earnings above £157 per week.

These will be paid to HMRC along with PAYE by the 22nd of the following month.


What is a National Insurance number?

A National Insurance number or NI number is a unique number that ensures your tax and NI contributions are logged against your name only.


How do I calculate student loan repayments?

If you are a Plan 2, e.g. an English or Welsh student who started their course on or after 1st September 2012:

You need to start repaying your loan when your annual income exceeds £21,000. The repayments are 9% of your income over the £21,000. Interest is charged on the outstanding amount but you can pay it off earlier if you desire.

If you are an employee, your employer will deduct the repayments from your salary. Payroll software will automatically calculate what needs to be deducted. Deductions will start the first month/week you go over the monthly or weekly threshold.


What is a P60?

A P60 summarises your pay, tax and National Insurance for the tax year. Employers must provide them to employees by 31st May after the end of the tax year (i.e. 5th April).