Chapter 5

Question 1

Introduction to payroll

Answer 1

Any business or individual that employs staff must operate a payroll system. Employment in the UK is regulated by government legislation.

Question 2

Registering as an employer

Answer 2

Business is required to register as an employer with HMRC when it starts to employ staff.

An employer must register before the first payday but cannot register more than two months before it starts to pay its employees. I can take up to 5 working days for a business to receive its employee PAYE reference number.

Question 3

Payroll software

Answer 3

HMRC requires employers to run thier payrolls using computerised payroll software. This online process is called Real time information (RTI)

Depending on the businesses size it can do one of he following:

Use a commercial payroll bureau, purchase patrol software from a software supplier or dowload free payroll software if the business has less than 10 employees.

Question 4

Record keeping for payroll

Answer 4

Required records to be kept:

What it pays its employees and what deductions it makes, reports it makes to HMRC, payments it makes to HMRC, payments it makes to HMRC, details of employee leave and sickness absence, tax code notices, taxable expenses or benefits.

The penalty for failure to maintain payroll records is £3,000.

Question 5

Personal data about employees

Answer 5

Employees are permitted to keep the following data about employees without their permission:

Name, address, dob, qualifications, NI number.

However, employers need their employees permission to keep certain types of sensitive data.

If employee asks to find out what data is kept about them, their employer will have 30 days to provide a copy of the information.

Question 6

Data protection and payroll information

Answer 6

GDPR requires businesses to take steps to protect any personal information that they collect.

Everyone who is responsible for using personal data must follow strict rules called data protection rules.

Question 7

HMRC inspections and visits.

Answer 7

HMRC is entitled to check the tax affairs of a business or an individual to ensure that they are paying the right amount of tax. If the business has not paid enough tax, it will be asked to pay the additional amount within 30 days with interest being charged from the day the amount was due.

Question 8

Gross pay

Answer 8

Gross pay - pay before deductions. Employees can be entitled for additional or alternative amounts which include holiday pay, sick pay, maternity pay and paternity pay.

Question 9

Taxable pay

Answer 9

Taxable pay is the gross pay of an employee minus any tax free elements, and is the amount on which income tax is charged. The government encourages some types of voluntary deduction from an employees pay by allowing the amounts to be deducted before income tax is charged. The amount of tax saved is tax relief. E.g charity donations and employee pension schemes.

Question 10

Net pay

Answer 10

Net pay is sometimes referred to as take home pay and is the total pay and allowances minus total deductions.

Question 11

Statutory deductions

Answer 11

An employee does not have to give written authorisation for statutory deductions as they are required by law.

Businesses are required to make statutory deductions from gross pay for: PAYE, National insurance contributions, student loans, pensions

Question 12

NIC

Answer 12

The type of national insurance paid by employers and employees is referred to as being class 1 national insurance.

The amount depends on on how much of their earnings fall within certain bands.

Employers pay class 1 NIC on the employees pay if it exceeds £175 per week. For most employees this is paid at 13.8%

Employers also pay class 1A and class 1B NIC on expenses and benefits that they give their employees. This is also paid at 13.8%.

Question 13

Employment allowance

Answer 13

Aims to encourage businesses to recruit staff by allowing eligible employers to reduce their NIC liability.

If a business has employees class 1 national insurance liabilities in the previous tax year of less than £100,000, it is eligible to claim employment allowance.

This allows employers to reduce thier annual insurance liability by up to £5,000.

The claim for employment allowance is made up on the employer payment summary.

Question 14

Pensions

Answer 14

An employer has to pay a minimum of 3% of the total earnings into the pension scheme and the employee must pay a minimum of 5%.

If an employee has voluntarily enrolled in a workplace pension, the employer must contribute the minimum amount if the employee earns more than:

£520 a month, £120 a week, £480 over 4 weeks

Question 15

Non statutory deductions

Answer 15

An employee must agree in writing for these deductions to be made from their pay. Examples:

Charitable giving - deducted from gross pay before tax but after NICs

Union membership fees

Private medical insurance

Saving schemes

Question 16

Payroll forms - payslip

Answer 16

When an employer pays it employees, it must give each of them a payslip that shows details of how their net pay is calculated. Must be provided to employees on, or before their pay day. Also must show:

Gross amount of the wages or salary before any deductions

The amounts of any variable or fixed deductions

Net amount of wages or salary payable

The number of hours

Question 17

P45

Answer 17

When employees leave an employment by law the payroll department must issue them with a form called a P45 on the date their employment is terminated or on the day of their final wage payment is made. The P45 summarises information about the employee and their pay to date.

A P45 has several parts:

Part 1A - the employees copy

Part 2 - copy for new employer and is given to the new employer with part 3.

Part 3 - completed by the new employer, and has a bottom section for them to fill out.

The P45 does not include any details of NICs.

Question 18

P60

Answer 18

Shows the tax an employee has paid in the tax year (April 6 to 5 April).

If the employee is working for an employer on 5th of April the employee must give them a P60 by 31st of May.

P60 proves how much tax an employee has paid on their salary which is necessary for:

Claiming back overpaid tax, to apply for tax credits, as proof of income if the employee applies for a loan or mortgage.

Question 19

P11D

Answer 19

Used to tell HMRC about any benefits in kind that the employee has received. E.g company car, gym membership. An employer must submit P11D forms online to HMRC by 6th July after the end of the tax year to which they relate. The employer must pay NIC on them - referred to as Class 1A NIC. The employer must pay any class 1A national insurance it owes by 22nd July.

Question 20

Full payment submission

Answer 20

Payroll software is used to submit a Full payment submission. This tells HMRC about payments employers have made to employees and deductions have been made.

The FPS must be sent to HMRC before the employees payday, even if the business is permitted to actually pay HMRC quarterly instead of monthly.

Question 21

Completing a FPS

Answer 21

HMRC has guidance on what to put in each field on an FPS:

Employer information, employee information, pay and deductions, employee pay information, national insurance, a new employee and when an employee leaves.

Question 22

Employer payments summary

Answer 22

In the following tax month after an employer has submitted its FPS, the employer can login its HMRC online account and vew its FPS. From the 12th of the tax month it will be able to see how much tax and national insurance it owes its HMRC online account.

An EPS needs to be sent by the 19th of the following month to apply for any reduction on what the employer owes on its FPS. The employer can also claim for the employment allowance of up to £5,000 on the eps.

If an employer has not actually paid any employees in the tax month, then it should send an EPS instead of an FPS.

Question 23

Penalties for late submission of payroll filings - 1

Answer 23

An employer who fails to make an FPS on time, or does not file an EPS, may be liable to pay the following:

A monlthy penalty based on number of employees. No penalty will arise for the first month. 1-9 - £100, 10-49 - £200, 50 to 249 - £300, 250 or more - £400

Question 24

Penalties for late submission of payroll fillings - 2

Answer 24

An estimate of any amount due to HMRC, based on previous submissions plus interest.

Filling penalty notices show the amount of filing penalty for each tax month in that quarter.

All penalties are due for payment within 30 days of the date of the penalty notice. Penalties that are not paid on time will attract interest.

Question 25

Penalties for inaccuracies in payroll filings

Answer 25

An employer can be charged a penalty which is a percentage of the potential lost revenue for HMRC.

Careless 0-30% UD 15-30% PD
Deliberate 20-70% UD 35-70% PD
Deliberate and concealed 30-100% UD 50-100% PD

Question 26

Monthly payroll payments

Answer 26

Tax and NICs deducted from employees pay plus employers NICs due, and any student loan deductions are payable to HMRC on a monthly basis, regardless of the frequency of the payroll. Employers have to pay the tax and NI reported on their FPS that was submitted in the previous month, minus any reductions detailed on an EPS. The employer must then pay what it owes by the 22nd of each month if paid electronically or 19th by post.

A small employer that usually pays less than £1,500 a month may be able to pay quarterly instead of monthly.

Question 27

Penalties for late monthly/quarterly payroll payments

Answer 27

If payments missed or received late, HMRC applies a range of penalties depending how many there are. First failure to pay on time is not treated as a default.

1 to 3 defaults - 1% penalty applied to the amount that is late in the tax month

4 to 6 - 2%

7 to 9 - 3%

10 or more - 4%

Outstanding after six months is 5% and another 5% if outstanding at 12 months.

Question 28

PAYE settlement agreements

Answer 28

A PSA allows an employer to make one annual payment to cover all the tax and NI due on minor or irregular benefits that they give to their employees.

Minor benefits and expenses include: incentive awards, telephone bills, small gifts, staff entertainment and non bushes expenses.

Irregular benefits and expenses are not paid over regular intervals. If an employer gets a PSA for these items, it will not need to:

Put them though its payroll to work out tax and NICs

Include them in its year-end P11D forms

Pay class 1A NICs as it will pay class 1B national insurance as part of the PSA instead.

The deadline for applying for a PSA is the 5th of July following the first tax year to which it applies.

Any tax and national insurance owed under a PSA must be paid by 22nd October following the tax year to which the PSA applies or 19th by post.

Question 29

Late payment of amounts due annually or occasionally

Answer 29

An employer may have to pay a penalty if it has not paid the full amount by the penalty date. Most cases the day after due date for payment. However for payments of NICs on benefits the penalty date is 30 days after the due date. Employers have to pay:

5% penalty if the full amount is not paid within 30 days of the due date

An additional 5% penalty if not paid within 6 months and another 5% if not paid in 12 months.