Principles Of Payroll - Week 4 Flashcards
Payroll is operated by businesses or individuals who ___________
Employ staff
You normally need to register as an employer with HM Revenue and Customs when you …
- Start employing staff
- Start using subcontractors for construction work
You must register even if you’re only employing yourself, before the first payday. You Cannot register more than 2 months before you start paying people.
HMRC are the relevant tax authority for payroll with powers to require businesses to comply with regarding to:
- Regulations about registration
- Record keeping
- Submissions of returns
- Payment of amounts due
- HMRC’s rights in respect of inspection of records and visits
Statutory deductions:
Employers are entitled to deduct statutory and other deductions from employees’ pay.
Businesses are required to make statutory deductions from gross pay:
- Pay As You Ean (PAYE)
- Employee National Insurance Contributions (NICs)
- Student loan repayments
- Pension contributions
Payslip
The most common payroll form.
Payslips are issued to employees and breakdown the wages earned and show the deductions which have been made and the net pay to the employee
HMRC require an employer to provide each employee with a paper or electronic payslips on or before their payday, and it must contain the following information:
- Earnings before and after any deductions(ie gross pay and net pay)
- amount of any deductions that may change each time the employee is paid, for example tax and National insurance
- the number of hours worked, if pay varies depending on time worked(eg is paid hourly or daily)
PAYE settlement agreement submission date
5th July following the first tax year it applies to
Class 1B NIC payment date
22nd October if paying electronically, 19th October otherwise
To decide whether an error amounts to carelessness, HMRC will take into consideration:
- How significant error is within the context of the taxpayer’s liability for the year
- The taxpayer’s abilities - HMRC would hold a finance manager to a higher account than the owner of a bakery
- Supporting evidence 0 are there any reasons which could have led to them making the mistake, e.g. a health issue.
What is considered to be negligence?
The omission to do something which a reasonable and prudent person would do
The difference between wages and your pay
Wages: Amount you are paid by your employer in connection to your job
Pay is the basic amount you should be paid(e.g. monthly or hourly rate)
Wages could include
- Any fees, bonuses, commission, holiday pay or other payments connected with your job
- Statutory payments
- Luncheon vouchers, gift tokens or other vouchers of fixed value that can be exchanged for money, goods or services
Wages will not include:
- Loans or advances of wages
- Payments of expenses incurred in employment
- Pension and redundancy payments
- Lump sums on retirement or in compensation for loss of office
- Payments in kind (Other than vouchers or tokens that can be exchanged or have a fixed value)
- Tips and other gratituties
You are protected against your employer making deductions from either your ____ or _____
Pay, wages
Your employer is not allowed to make a deduction from your pay or wages unless:
- it is required or allowed by law, for example National Insurance, income tax or student loan repayments
- you agree in writing to a deduction
- your contract of employment says they can
- it is a result of any statutory disciplinary proceedings
- there is a statutory payment due to a public authority
- You have not worked due to taking part in a strike or industrial action
- it is to recover an earlier overpayment of wages or expenses
- it is a result of a court order
Can a deduction reduce your pay below the National Minimum Wage rate?
It is not allowed, even if you give permission.
Under GDPR regulations, when is information considered to be ‘personal’?
When it relates to an identified or identifiable individual
Under GDPR regulations, what payroll data is considered ‘Sensitive’?
- Racial or ethnic origin
- Political opinions
- Trade union membership
- Religious information
- Data about someone’s health
There are limited circumstances governing when you can process ‘sensitive’ information
Payroll considerations to be compliant with GDPR:
- Do you need the data you collect?
- Have you mapped out what data you should be collecting
- Are you prepared for a data breach (including when one should be reported)?
- Do you have a process for removing inaccurate (or out-of-date) information?
- The size of your organisation doesn’t matter - you will still likely be the target of a data breach
How to keep payroll information safe:
- Monitor and review the number of staff with access to payroll data
- Introduce password walls, encryption and other protections to ensure the safety and security of payroll files, particularly preventing information sharing
PAYE forms : P45
Parts
- You’ll get a P45 from your employer when you stop working for them.
- Shows how much tax you’ve paid on your salary so far in the tax year
- A P45 has 4 parts: Part 1, Part 1A, Part 2 and Part 3
Part 1: Your employer sends details for Part 1 to HM Revenue and Customs and gives you the other parts
Part 2 and 3: Given to your new employer (or to Jobcentre Plus if you’re not working)
Part 1A: Keep for your own records
Shows:
- The employee’s code and details of his income and tax paid to date.
- personal details
- leaving date
- tax code
- gross salary
- tax deducted
PAYE forms: P60
Shows:
- The total taxable earnings for the year
- Tax deducted
- Code number
- NI number
- Employer’s name and address.
Deadline
- The P60 must be provided by 31st May following the end of the tax year
Multiple jobs
- You’ll get a separate P60 for each of your jobs every tax year
P60 purpose
- You’ll need your P60 to prove how much tax you’ve paid on your salary, e.g. to claim back overpaid tax, to apply for tax credits, as proof of your income if you apply for a loan or a mortgage
PAYE forms: P11D
Employer might submit this to HMRC if you get ‘benefits in kind’(e,g, a company car or interest free loan). Any taxable benefits which have not been taxed through PAYE.
P11D(B) return of Class 1A NICs - this class of NIC is due from employers on all non-cash benefits
Details shown include:
- The full cash equivalent of all taxable benefits(other than those which are taxed through PAYE), so that the employee may enter the details on their self-assessment tax return
Payroll: Real Time Information explanation:
Employers are required to submit information to HMRC electronically. This can be done by:
A) Using commercial payroll software
B) Using HMRC’s Basic PAYE Tools software(Designed for use by an employer who has up to nine employees)
C) Using a payroll provider(Such as an accountant or payroll bureau) to do the reporting on behalf of the employer
Employers need to send information to HMRC every time they pay their employees, rather than waiting until the end of the year.
Two types of submissions that you’ll need to make:
- Full Payment Submission (FPS) HMRC will use this to calculate how much PAYE and NIC liability is due from you each tax month
- Employer Payment Summary(EPS) This is only submitted when you need to advice HMRC of any alterations to this liability or where you are informing them of a nil payment
Setting up a PAYE system and registration with HMRC is required by anyone with…
at least one employee earning at least the lower earnings limit for Class 1 NIC purposes(which is currently £123 per week)
The company must register before/after they make their first payment to an employee but not more than 2 months prior/later than the first planned payment
Before
Prior
After payroll registration has been completed online, HMRC will issue…
A PAYE reference number, which is required when sending payroll information to HMRC
Gross pay definition
Definition
The total amount that the employer owes the employee before any deductions have been made.
This will usually be their annual salary, divided by the number if pay periods in the year(12 if the employer pays their employees monthly); however, it may be increased, for example with overtime payments or a cash bonus.
This may also be referred to as ‘gross earnings’.
List of things it includes:
- basic pay
- overtime
- commission
- bonus
- any allowances
Statutory deductions definition
Deductions required by law(statute) for employers to deduct from gross pay. This includes :
- NIC
- Student loan repayments
- Some pension contributions
- Income tax (PAYE)
Statutory deductions: Income tax
- Employees pay income tax under the PAYE system.
- Each time an employee is paid by their employer, the income tax for that period (e.g. monthly) is deducted from their wages by the employer
- At regular intervals, the employer pays the income tax over to HMRC on the employees’ behalf
- Income tax on each employee’s taxable pay is calculated using tax codes
- Tax codes are provided by HMRC and summarise the tax-free pay that the employee is allowed in the tax year(6/04->5/04)
- By inputting the PAYE code into payroll software, the relevant tax rates can be applied to the employee’s taxable pay to arrive at the income tax due to HMRC for the pay period
Statutory deductions: Employee’s NIC
-Employees must pay employees’ NIC to HMRC.
- NIC is a tax, calculated separately from income tax
- An individual employee’s NICs are deducted from employee’s wages and paid over to HMRC, together with the employee’s income tax
- NIC is calculated using relevant thresholds which changes annually and are published by HMRC prior to the start of each tax year
Statutory deductions: Student loan repayments
-Deducted from pay by employers and collected by HMRC along with PAYE.
- HMRC then transfers the loan repayments to the Student Loans Company, which is a government-owned organisation.
- When an individual earns above a certain level of income, they start to repay their student loan; the employer is required to deduct these repayments via payroll
Statutory deductions: Pension contributions
- A minimum employee contribution for those employees who have not ‘opted out’ of the workplace pension
- The money is deducted from gross pay and transferred to a pension administrator to provide a pension for the employee on retirement
Voluntary deductions
-These items can only be deducted from an employee’s gross salary if the employer has the employee’s written permission to do so.
- An example: An employee may choose to make additional pension contributions above the statutory minimum.
- Other voluntary deductions include trade union fees and give-as-you-earn payments to charity(GAYE)
Taxable pay definition
- Taxable pay is the amount on which income tax is charged under PAYE.
- This will be calculated as: Gross earnings - allowable deductions
- Allowable deductions are certain expenses incurred by an employee in respect of their employment duties, which HMRC allow to be deducted before PAYE is applied. They include employee pension contributions
- You will not be required to know which expenses of employment are deductible in the exam
Net pay definition
Once all deductions have been made, the amount paid to the employee is called net pay, sometimes referred to as ‘Take home pay’
Employer’s national insurance contribution
- Statutory
- Due for each employee
- Tax suffered by the employer
- No deduction from employee’s gross pay
- Paid by employer to HMRC
Employer’s pension contribution
- Voluntary
- This is in addition to gross pay, increases total cost of employing individuals, not deducted from gross pay
Payroll records HMRC require to be kept:
- Amounts paid to employees and all deductions made
- All reports(FPS and EPS forms) made to HMRC
- Payments made to HMRC
- Employee leave and sickness absence
- Tax code notices
- Reimbursed expenses and benefits provided to employees
- Payroll Giving Scheme documents
How long do payroll records need to be kept for?
For three years from the end of the relevant tax year to which they relate, e.g. information relating to the tax year 24/25 is required to be kept until 5th April 2028.
A penalty of £3,000 per year may apply for failure to maintain full records
As payroll records contain personal data relating to employees, employers must ensure they comply with…
The General Data Protection Regulations (GDPR) when storing payroll records. This includes ensuring data is kept secure, accurate and up-to-date
Payroll software carries out the following functions:
- Recording employee details
- Calculating pay and deductions
- Reporting payroll information to HMRC
- Calculating PAYe and NIC liabilities
- Calculating statutory pay, e.g. statutory maternity or sick pay
Payroll software providers will update their software for any changes in tax legislation which would impact on the payroll calculations
When choosing payroll software, employers must consider:
The software’s functionality and suitability for the business. Certain software does not allow different pay periods for different employees
Payroll: Full Payment Submission (FPS)
Includes details of:
- The amounts paid to employees
- Deductions made under PAYE such as income tax and national insurance contributions
- Details of employees who have started or left employment since the last FPS
If no employees are paid in a particular tax month(e.g. small companies that pay director once or twice a year), no FPSs are required for that month. A ‘tax month’ runs from the 6th of one month to the 5th of the next.
Instead, the employer will file an Employer Payment Summary.
Payroll: Employer Payment Summary(EPS)
- When no employees have been paid that month(6th to 5th)
- Must be filed within 14 days of the end of the tax month(i.e. by the 19th)
- Can also be filed in addition to the FPS, where the employer wants to make certain claims which are not available on an FPS. These include:
1. Reclaims of statutory payments
2. A claim for the Employment Allowance
3. Reclaims of Construction Industry Scheme deductions
4. Claiming NIC holidays for previous tax years
5. Paying the Apprenticeship Levy, which is an additional tax on very large employers.
Payment of monthly PAYE
Deadline for payment to HMRC
- Income tax and National insurance is normally paid over to HMRC monthly, within 17 days of the end of the tax month(if paid electronically) or 14 days after the end of the tax month(if paid by cheque).
Large employer rule
- Large employers(with 250 or more employees) must make electronic payments.
Quarterly payment option
- If an employer’s average monthly payments(i.e. total income tax, employee’s and employer’s NIC) under the PAYE system are less than £1,500, the employer may choose to pay quarterly, within 17 or 14 days of the end of each tax quarter
Tax quarters end dates
- Tax quarters end on 5th July, 5th October, 5th January and 5th April.
If payment goes above quarterly limit
- Payments can continue to be made quarterly during a tax year even if the monthly average reaches or exceeds £1,500, but a new estimate must be made and a new decision taken to pay quarterly at the start of each tax year.
PAYE settlement agreement (PSA)
The employer agrees to pay the employees’ income tax on certain one-off benefits.
The deadline for submitting an application for a PSA is 5 July after the end of the tax year
A business must register for payroll before the first payday as it can take ______to get an employer PAYE reference number
15 working days
If a business has fewer than _ employees, it can use HMRC’s basic PAYE tools to calculate payroll, which is free
10
If a business has more than _ employees a business must use a ‘paid-for software’ that has been tested and recognised by HMRC
10
HMRC has lists of payroll software that is valid. Does it recommend a particular one?
No
HMRC requires that payroll records are held securely and meet the requirements of…
the Data Protection Act 2018
Personal data definition
Anything that could be used to identify someone directly or indirectly including:
- name
- age
- address
- credit card number
- location-based data(web address, IP address, cookie data)
- health
- ‘sensitive data’ (race, ethnicity, religious beliefs, trade union membership, genetic and biometric data)
Data protection: businesses should inform employees of the following:
- what personal data is used for and why
- the lawful basis for processing personal data
- how long that personal data will be held
- who the data is shared with
- if any external data processors(payroll agency) are used
- employee rights in relation to data processing
- any transfers of personal data
Individual rights in relation to data held by a business:
- to be told what is held and why
- of access
- to rectify any errors
- to tell the business to erase the information
- to restrict processing
- to data portability
- to object
- in relation to automated decision making and profiling
