Chapter 8: Operating Payroll

Question 1

Define PAYE (Pay As You Earn) and what is included.

Answer 1

PAYE is a legal duty for employers to collect and pay over the following on behalf of HMRC:
- Income tax
- Class 1 primary National Insurance (employee’s NI, deducted from wages)
- Class 1 secondary National Insurance (employer’s NI, an additional cost of employing staff)

Question 2

When does the tax year run from and to?

Answer 2

From 6 April to 5 April

Question 3

What is a tax code used for?

Answer 3

A tax code is used to ensure the correct amount of income tax and national insurance is deducted from an employee’s pay

Question 4

What are the four conditions that require a business or individual to register as an employer with HMRC?

Answer 4

If any of its employees:
- are paid £123 or more a week
- have another job
- receives a pension
- are provided with company benefits

Question 5

What will the employer be issued with upon registration for PAYE?

Answer 5

An employer PAYE reference number (ERN) to be used on payroll records

Question 6

What records must employers keep for PAYE purposes?

Answer 6

• Reports to HMRC
• Taxable benefits and expenses
• Amounts paid to employees
• Tax code notices

Question 7

Why is payroll software used and what can it help with?

Answer 7

Payroll software is used to manage payroll in-house rather than outsourcing. It helps with:
- Calculating employees’ pay and deductions
- Reporting payroll information to HMRC online

Question 8

What are the two types of payroll software available and who would use each?

Answer 8

1. Free software
For employers with fewer than ten employees (e.g., HMRC’s Basic PAYE Tools)
2. Purchased software
For employers with ten or more employees

Question 9

What are the four statutory deductions?

Answer 9

• Income tax
• National Insurance contributions (NICs)
• Student loan repayments
• Pension contributions (if applicable)

Question 10

What conditions must an employee meet to be enrolled in a workplace pension scheme?

Answer 10

• Is not already in a pension scheme
• Works usually in the UK
• Is classified as a worker
• Earns at least £10,000 per year
• Is aged 22 to state pension age

Question 11

What are non-statutory deductions and what do they include?

Answer 11

Non-statutory deductions are additional deductions made with the employee’s written authorisation or contract. These can include:
- Till shortages or breakages
- Life or medical insurance
- Trade union membership
- Savings schemes
- Charitable donations (except GAYE)

Question 12

What is the correct order of deductions from an employee’s salary?

Answer 12

1. Calculate National Insurance Contributions
2. Deduction Pension/Student loan/GAYE
3. Calculate Income Tax
4. Deduct NI and income tax
5. Deduct non-statutory

Question 13

What is GAYE?

Answer 13

GAYE stands for Give As You Earn, a system where employees make charitable donations through regular salary deductions