Navigating payroll and PAYE regulations in the United Kingdom

Navigating the maze of payroll regulations in the United Kingdom can seem daunting and time consuming. From PAYE tax deductions to auto-enrolment in pension schemes, the journey through this landscape requires careful navigation. This blog post will guide you step-by-step, demystifying some of the major regulations and ensuring your business steers clear of potential pitfalls. Whether you’re a startup taking your first steps or an established business looking for a refresher, read on to ensure you are fully compliant, protecting your business and your employees alike.

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What is payroll

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Payroll refers to the process by which employees receive their wages or salaries. It encompasses all employee wages, bonuses, deductions, net pay and withheld taxes. The employer is responsible for calculating the correct pay, making the necessary deductions, such as income tax, national insurance contributions and pension. 

The payroll process is strictly regulated by the government. It is the employer’s responsibility to deduct accurate income taxes from the employee’s earnings and transfer these taxes to HMRC. It’s a complex tax with significant legal and financial implications, making it crucial for businesses to manage their payroll efficiently and accurately.

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Payroll and business structure

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If you are a limited company, you will need to run payroll for all employees, including yourself, which is handled under the PAYE (Pay As You Earn) system. You will need to run payroll even if you are the only employee of a limited company as you are not classed as self-employed. You are also held to RTI rules (Real Time Information) which means the payroll has to be calculated and finalised no later than your payday otherwise you will open yourself up to fines.

Sole traders and partnerships don’t need to run payroll but should keep track of payments and deductions for future reference when completing their self assessment tax return. This is the same case for limited liability partnerships. However, a PAYE scheme will need to be opened for any employees working for a sole trader or a partnership or LLP. It is up to you to correctly ascertain whether the person you are hiring will be a partner of the business or an employee. To learn more about the difference between an employee and a partner, click here and the different types of business structures, click here.

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How do you run your first payroll and register for PAYE

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In the UK, there are specific steps to follow when running your first payroll and registering for PAYE. The first step involves registering as an employer with HMRC, you will need to provide general information about your business and provide your company’s Unique Taxpayer Reference (UTR), which you should have received when registering as a limited company.

Next you will need to choose the day you plan to pay your employees, including yourself. It’s important to note that you should do this up to 4 weeks before you pay your staff. Once you are registered, within the next 2 weeks, you will receive a letter with your PAYE reference and Accounts Office reference number. You will also receive an activation code in the post which will provide you with the number to active your PAYE online services. 

The PAYE online account can be used to check how much you owe HMRC, submit your PAYE bills, access tax codes, appeal penalties and other enquiries. 

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PAYE reporting required for HMRC

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To report PAYE to HMRC, you will need to use approved payroll software. HMRC also provides a software with a free package available for companies with fewer than 10 employees, however, there are many other payroll software options available. Employers have two reporting obligations: to HMRC and to the employees. 

On 6 April 2013, HMRC implemented the Real Time Information (RTI) system, where employers have to report PAYE information to HMRC on or before their employees’ pay day. If you are filing online, this is often handled by your payroll software. The two reports that are sent to HMRC using RTI are the Full Payment Summary (FPS) and Employer Payment Summary (EPS). If any of the employees have received benefits in kind, then the RTI system is also used to submit an annual P11D form.

For every employee you pay, you must submit a FPS, which provides general information about the employee such as the name, address, national insurance number as well as their gross pay, tax and contributions. An FPS will also be used to notify the HMRC if a new person has joined your team or on the contrary, left. You must submit the FPS on or before the date that you pay your employees otherwise you may need to pay a late fee.

A simple equation for your FPS liability (historically known as a P32 liability) could look like this:

‍PAYE + Employer’s NIC + Employee’s NIC + Student Loan + Postgraduate Loan + Benefits + App Levy Charge - SMP Reclaim - App Levy Allowance - Employment Allowance

An EPS report can be sent once a month by the employer to reclaim statutory deductions or to tell HMRC that no employees have been paid. A potential reason for why no employees have been paid is outlined at the bottom of this article. 

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Avoid these common payroll compliance penalties

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Late filing - if you don’t submit your FPS / EPS on time, you may be charged between £100 to £400 depending on the number of employees you have.

‍Late payment - if you don’t pay the PAYE owed to HMRC on time, the penalty will depend on the amount of tax owed and length of the delay starting with 1% with additional penalties accrued for prolonged periods of missed payments.

‍Inaccurate reporting - we all make mistakes and HMRC takes that into account when issuing penalties. 

It is also important and legally required for you to keep records for four years minimum in the UK. Some information that is valuable for you to store as an employer would be salary, salary deduction, tax codes, employee leave and other key information. For this reason, we suggest that you establish clear procedures for documenting and tracking changes in the payroll process as well as have a way to process and store data. This will provide you with an audit trail should there be a necessity. 

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Dates to keep in mind

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There are various dates that are necessary for you to follow, not including the payday you have chosen, which is often the last working day of the month.

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19th of every month - submit EPS if necessary

22nd of every month - by this date, pay any PAYE and NICS to HMRC

31 May - provide all employees with P60s

6 April - start new year’s payroll

5 July - deadline to submit PAYE settlement agreement. PSA allows an employer to make one annual payment to cover minor, irregular or impractical expenses or benefits for your employees. If you want to use this service, you will need to apply for it.

6 July - submit the Expenses & Benefits Forms P11D and P11D(b), and provide P9D and P11D forms to relevant employees. Although benefits in kind deductions can be done in real time through FPS, some benefits in kind need to be paid annually, such as employer-provided living accommodation.

22 July - If you submitted a P11D(b), you must pay HMRC the required Class 1A National Insurance Contributions by the 19th if non-electronically or 22nd if electronically.

22 October - If you have a PAYE settlement agreement, you must pay all tax and Class 1B National Insurance owed by the 19th if non-electronically or 22nd if electronically.

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Pension contributions

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Under the UK’s pension regulation, employers have a legal duty to automatically enrol eligible employees into a pension scheme. The workplace pension acts as a savings pot that the employee will be able to access during their retirement. 

Eligible employees are those who are aged between 22 and the state pension age, earn over £10,000 a year, and work in the UK. There are minimum contribution requirements that are set by the government. Currently, the employee needs to pay 3% of their qualifying earnings into workplace pension and employers need to pay 5% of the employees qualifying earnings. There are options available, such as pension opt in, opt out and re-enrolment.

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Cancelling your PAYE registration 

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Depending on your circumstances you may need to think about cancelling your PAYE registration. If you no longer have employees and you expect this to be permanent then you should inform HMRC and cancel your PAYE registration, failure to do so may incur penalties from HMRC as they will start making estimates based on your prior filings. When cancelling your PAYE registration, you will need to send a final payroll return to HMRC, submit any expenses and benefit returns, and provide your employees with P45 forms.

If you temporarily need to stop employing staff or you operate a seasonal business, you are able to file an EPS to notify HMRC that there are months where you are not planning to pay staff.

In the case where you start employing staff again but have cancelled your PAYE scheme, you will need to set up a new PAYE scheme and HMRC will issue you with a new reference number. 

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To summarise

Understanding and adhering to payroll regulations in the UK is an essential duty for all employers. This includes accurate and timely submission of FPS to HMRC, adhering to the rules of automatic enrollment into pension schemes, and ensuring you keep accurate records for all of your employees. Failure to comply with these regulations can lead to significant penalties, highlighting the importance of thorough knowledge, meticulous record-keeping and using reliable payroll systems. You can always seek professional guidance or help from accountants and bookkeeping that will guide you through the process. Get in touch with us if you would like us to help you with this.

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