Payroll in the UK: A Complete Guide

Payroll, payroll, payroll. The department often goes under the radar but is crucial for businesses everywhere. Put simply, payroll ensures staff are paid the right amount at the right time each month. They’re often the unsung heroes of the business world, chipping away to make sure the workforce gets rewarded for all its hard work.

At its core, payroll refers to the financial record of salaries, wages, bonuses, deductions, and other compensation paid to employees by an organisation.

It requires calculations of hours worked, the amount of payroll deductions, and all the relevant tax codes for employees. Beyond paying people the right amount, it plays a vital role in keeping the morale of staff and creating a positive work environment.

In this article, we’re going to dive into payroll and all that it involves, from compliance and reporting to tax deductions and payroll software.

So without further delay, let’s get into it.

Key Aspects of Payroll

Employee Information

Before anyone starts a new role, the payroll department ensures they have all the correct information. As simple as it sounds, it makes sure staff start off on the right foot from day one. Incorrect data can lead to mistakes which could result in the employee not getting paid or being paid the wrong amount. This can have a real negative effect on staff morale. The potential personal issues that can be triggered by a payroll mistake make the need for accurate data incredibly important. Something as simple as a late payment can have knock effects on staff, particularly with direct debits and standing orders leaving people’s accounts at specific dates each month.

Compliance Issues

There are numerous compliance issues and legal issues related to payroll that need to be adhered to including minimum wage laws, overtime regulations, child labour laws, GDPR and data protection, and much more. Adhering to these laws and regulations is essential for organisations to minimise any potential legal and financial risks associated with payroll errors or non-compliance.

Timekeeping and tracking attendance.

An important part of payroll’s job is tracking the number of hours worked by employees, including regular work hours, overtime, holidays, and paid time off. Each business is different, and the shift patterns and working hours can vary vastly, even across the same company. Let’s take a look at a high-street retail business as an example. It will employ shift workers to work in-store, along with warehouse staff to ensure the shop is stocked, and on top of that, there will be office staff likely working more regular 9 to 5 hours. This is just the tip of the iceberg, and organisations like this are highly complex in terms of the staff’s working patterns. As a result, managing the payroll and tracking the varying shift patterns and working hours of staff can be a complex task.

Payroll Processing

Leading nicely on from the earlier point, once hours have been tracked, calculating wages is the next important step. It’s the responsibility of Payroll to calculate gross wages based on hours worked, salary rates, and any additional compensation such as bonuses or commissions. Each business will be different, but it’s important that the payroll team know what people are paid (yes, really) and what their bonus structures are if they have any.

Tax and Benefit Deductions

You can’t go far in the business world without considering taxes, and payroll is no exception. Each pay period it’s vital the payroll department consider all the various payroll deductions that come out of an employee’s wage. This includes everything from income tax, and National Insurance through to Student loan repayments and pension plan contributions.

Compliance and Reporting

Tax reporting falls under the remit of payroll departments and includes generating and submitting Real-Time Information (RTIs) to HMRC, including Full Payment Submissions (FPS), Employer Payment Summaries (EPS), and other tax-related filings.

The payroll team are also responsible for reporting pension contributions and pension scheme details to a business’s chosen pension provider, so the business complies with Auto-Enrolment regulations.

Automation, Automation, Automation

Fortunately, payroll software now exists that allows businesses to automate payroll processing, calculate deductions, and even provide handy reports.

For employers, it allows them to keep track of their payments in one place, reduces the potential for human error in calculations, and saves time when it comes to paying staff.

For employees, they’re provided with a handy app that’s home to all their payslips and documentation, meaning no more scrambling through emails. The apps are fully secure and allow integration with HR systems to provide employees with a seamless experience for getting paid.

Another benefit of the software is that it integrates with accounting systems such as Xero, providing a one-stop shop for a business’s financial reporting.

Stick around to hear us cover the benefits of payroll software in more detail.

Find out about the key payroll dates and what’s changed this year in more detail.

Salary and Wages: what’s the difference?

I’m sure we’ve all used the phrases salary and wages interchangeably, but they’re subtly different.

In simple terms:

A salary is a fixed, regular sum given to an employee, usually expressed as an annual figure divided into pay periods (monthly, bi-monthly). Salaried workers receive the same amount each month, regardless of the number of hours they work. Take your typical office worker doing 9 to 5. They would usually be receiving a salary rather than a wage.

Wages, however, are paid based on the amount of hours a person works calculated from an hourly salary. A good example of a worker on a wage would be someone in the hospitality industry who gets paid for the amount of hours they work.

Salaries are paid on a consistent basis, and tend to be the same every time. The take-home amount may fluctuate depending on deductions, commissions or bonuses, but generally, the salaried amount will stay the same.

Whereas, wages are dependent on the amount of hours worked. Wages are calculated by multiplying the hourly rate by the number of hours worked.

Overtime Eligibility

In the UK, overtime pay is determined by something called the Working Time Regulations (WTR) that dictate things like minimum wage, maximum working hours and any health and safety considerations associated with working.

Salaried workers may be eligible for overtime pay if they work extra hours, however, this depends on what it states in their contract. Any overtime that is paid, must also adhere to the National Minimum Wage Compliance Act (NMW) to ensure employees are paid fairly.

It’s also worth noting that some salaried workers may be exempt from overtime pay in relation to the WTR. However, this doesn’t mean the employer can’t offer them overtime pay as part of their contract.

For employees on a wage, they’re generally eligible for overtime pay when they work over a certain number of hours in a workweek. Generally, overtime for hourly workers is calculated at 1.5 times their usual wage.

Perks and Benefits

Salaried workers may be eligible for more benefits than hourly workers, however, this is entirely dependent on the employer. Benefits and perks such as health insurance, retirement plans, paid time off and bonuses are part and parcel of most salaried jobs, however, they may not be as common in jobs where workers are paid a wage. Of course, there is no hard and fast rule to this, and each employer will differ. Ultimately, its important to read the contract to work out what is and isn’t being offered.

Stability

There is a level of stability and certainty that comes with a salaried position as opposed to a waged role. Workers will generally know how much they’re getting each month, regardless of their workload or the number of hours they’ve worked.

For hourly workers, wages may differ between pay periods depending on the number of hours worked. So, while waged workers may be more likely to benefit from overtime, the unpredictability of their take-home pay might be off-putting to some.

Overall, the classification of workers as salaried or hourly in the UK is influenced by a variety of factors, including employment contracts, job roles, legal requirements, industry practices, collective agreements, and employer preferences. It’s essential for businesses to understand the implications of these classifications and ensure compliance with relevant employment laws and regulations when determining the pay structures for their workforce.

Payroll Deductions

In the UK, there are lots of payroll deductions that come out of employee’s take-home pay. Although your employees might hate them, they’re incredibly important for things like taxes and benefits. They cover all kinds of aspects including income tax, National Insurance contributions, and workplace benefits like pension schemes or health insurance.

The onus is on employers to make sure these deductions are calculated correctly and that they adhere to the rules set out by HMRC.

It can be a minefield for employees as they need to understand HMRC regulations, along with pension rules and what’s agreed in their employment contracts. Getting it wrong can lead to penalties and legal issues, so it’s important to get it right. Of course, with technology, things like calculating deductions can be made much easier and reduce the chance of human error.

Either way, businesses need to be thorough by calculating deductions correctly, communicating with employees and staying within the law.

Payroll Taxes

In the UK, taxes are a fundamental aspect of payroll management, impacting both employers and employees.

The first and most obvious one is income tax, something we’re all very aware of in the UK. It’s the employer’s responsibility to deduct this from an employee’s wages based on their tax code which is decided by HMRC. The amount deducted then depends on different factors such as earnings and the tax allowance.

Another obvious one is National Insurance Contributions (NICS) which both employers and employees contribute to. But what for I hear you ask? Well, National Insurance goes towards state benefits such a state pensions and unemployment benefits. Like income tax, NICs are taken from an employee’s wage based on their earnings and NIC category.

Of course, there are other tax deductions such as student loan repayments, workplace pension contributions and any court-ordered deductions (like child maintenance).

To stay compliant with tax laws in the UK, employers must correctly calculate and deduct taxes based on tax rates, allowances and any thresholds set out by HMRC.

Along with getting a slap on the wrist from HMRC, you could end up either underpaying or overpaying if these calculations are wrong.

It’s also incredibly important for employers to be aware of the deadlines for tax deductions, which are set out by HMRC.

Without going into too much of the nitty gritty, this involves submitting Real-time Information (RTI) reports and making payments for income tax, NICs, and other deductions.

RTI simplifies payroll by having employers report pay and deductions to HMRC every time they pay staff, ensuring tax information is up to date for accurate calculations and compliance. It helps both employers and HMRC keep track of earnings and taxes straightforwardly.

Keeping track of payments, tax deductions and employee earnings is key to maintaining levels of transparency and compliance during any tax audits or inquiries.

Overtime and Bonuses

As mentioned earlier in the article, whether an employee earns overtime is usually dependent on whether they’re a salaried or hourly worker.  In this section we’re going to explore how payroll should approach paying staff who are entitled to overtime pay and bonuses.

• Calculating overtime pay

Overtime is calculated simply by going off an employee’s hourly rate and working out the number of additional hours worked. The usual rate for overtime pay is 1.5 of an employee’s regular hourly rate, but this may also double for any overtime worked on weekends or holidays. Obviously, this can vary depending on a company’s policies, policies meaning its important for staff to digest the employee handbook to work out what they’re entitled to.

• Incorporating bonuses into payroll

Who doesn’t love a bonus? Working out bonuses and how to distribute them to employees is the first step. Creating a clear process on how and when bonuses are given is good for staff morale and makes people feel as if their working towards a common goal. Things to consider are individual performance targets, team goals and company wide achievements. Tailor each bonus to the individual and their role, and give achievable targets that allow staff to feel like they’re working towards a greater goal.

For employers, deciding how bonuses are paid is an important part of the payroll process. Should it be paid in one lump sum? Or should it be distributed over multiple payments? Communicating the bonus payment process is incredibly important for managing expectations and keeping staff on side.

Not to bring the mood down, but bonuses are generally subject to income tax and National Insurance contributions in the UK (boo). Employers must calculate and deduct the appropriate tax and NICs from bonus payments using the employee’s tax code and NIC category.

Payroll Processing

So now we get down to the nuts and bolts of payroll, payroll processing. Think of it as the engine room of a business, ticking away in the background ensuring staff are getting paid on time.

It’s easy to underestimate the importance of payroll processing, but make a mistake paying a staff member, and you’ll quickly realise how reliant the business is on this humble operation.

Each business will be different, but identifying what works for your business is the first step. Employers have the flexibility to decide when and how often their employees get paid, whether it’s weekly, bi-weekly or monthly.

As with all of this advice, when you decide to pay staff depends on the type of business you run.

For example, office staff working Monday to Friday, 9-5, will most often be paid monthly, either at the end or start of the month for the month just worked.

Whereas industries like hospitality or retail may choose to pay their staff weekly or bi-weekly. Often it is industries that favour shift-based work patterns that lean towards more regular payments to staff.

If your business has lots of different workers, some working shifts, some working more regular hours, then managing the payroll efficiently is more complicated. Often this means businesses will have an outsourced payroll team or an in-house payroll manager, which we’ll get onto shortly.

The key is paying staff consistently and on time. That’s all anyone wants!

Whatever pay period your business chooses, make sure staff get paid efficiently every time.

Payroll Software

So, it’s already obvious, that there is a lot that comes with payroll. Fortunately, payroll software now exists to automate many of the processes.

Advantages of Using Payroll Software:

Saves Time: Payroll software automates many time-consuming tasks, such as calculating wages, deductions, and taxes, reducing the need for manual data entry and calculations. This saves HR and payroll staff valuable time, allowing them to focus on other critical aspects of their roles.

Accuracy: Yes, payroll software can minimise errors in payroll processing by performing calculations automatically. By reducing manual calculations, the risk of human error, such as incorrect data entry or miscalculations, is massively reduced. As a result, businesses can feel assured that wage payments and tax deductions will be calculated accurately.

Staying Compliant: Payroll software is designed to stay up-to-date with changing tax laws, regulations, and reporting requirements. It helps ensure compliance with HM Revenue & Customs (HMRC) regulations, including Real-Time Information (RTI) reporting, National Insurance contributions, and statutory payments such as sick pay and maternity pay.

Data Security: But is payroll software safe? In short, yes. Payroll software offers tonnes of solid security features to protect sensitive employee data, such as bank details, tax information, and salary records. Encryption, access controls, and regular backups, generally come as standard, meaning you’ll be fully protected from any unauthorised attempts to access data.

Reporting and Analysis: Most payroll software comes with super useful reporting capabilities, allowing businesses to create various payroll reports, such as payslips, tax summaries, and year-end reports. The reports offer some clever insights into payroll expenses, employee earnings, and tax liabilities, all of which help decision-making and financial analysis of the business.

Employee Self-Service: Many payroll software solutions offer employee self-service portals, allowing employees to access their pay slips, tax documents, and personal information online. Something as simple as an employee portal is incredibly helpful, allowing staff to manage any payroll queries, update personal details and check their payment history whenever they like.

Outsourcing Payroll

As you can probably tell by now, managing a business’s payroll function is no easy task. It requires lots of compliance, lots of important calculations and lots of responsibility to pay staff on time.

For sole traders or small businesses with only one or two members of staff, it might be tempting to keep it all in house. However, there comes a point where many business owners will entertain the thought of outsourcing their payroll. Here are some of the pros and cons of outsourcing your payroll:

Pros of outsourcing payroll

• Save Time and Money: Time is money, and outsourcing your payroll is one way to reduce the number of jobs on your never-ending list as a business owner. That way, business owners can focus on strategic, forward-looking tasks rather than spending time on administrative stuff. For businesses with in-house payroll departments, it can be expensive to train staff, employ specialists and pay for all the relevant technology.
• Let the experts do what they do best: That’s not to say an inhouse payroll manager wouldn’t have the same capabilities of course. But often, when you outsource payroll, you are getting the knowledge of a whole business rather than one or two individuals. Businesses that offer payroll as a service deal with lots of different clients, meaning they’ll have shed loads of experience and knowledge accumulated over the years. All for a fraction of the cost of paying someone internally.
• You grow, they grow: Businesses offering payroll will be ready to scale with you, often faster than the process of hiring more team members internally. Whether your business is growing, or maybe has taken a seasonal dip, an outsourced payroll team will be able to adapt quickly to your needs.
• Privacy: yes, outsourcing your payroll is incredibly safe, and your privacy and data protection will be number one on their list. This keeps you protected from any potential data breaches or any unauthorised attempts to access your payroll data.

Cons of Outsourcing Payroll

• Loss of control: Outsourcing payroll may mean relinquishing some degree of control over the payroll process to a service provider. If handled badly, businesses may face challenges in monitoring and managing payroll operations, leading to concerns about transparency and accountability.
• Over-dependency on Service Provider: if left unmonitored, businesses can become overly dependent on the reliability and performance of the payroll service provider. If the service provider experiences downtime, errors, or service disruptions, it can impact payroll processing and create disruptions in wage payments.
• Cost: for some businesses, the cost of outsourcing payroll may be a sticking point. When cash is tight, often external agencies are the first element to go. But often this can be a short-sighted decision.

• Choosing the right payroll provider: Find a payroll service provider that prioritises customer satisfaction, has a solid track record of working with similar businesses and has the positive reviews to boot.

A good, forward-thinking firm will utilise technology to streamline the process and to keep your data protected, and will work with you, becoming an essential part of your team.

Compliance and Legal Considerations

As mentioned earlier, a large part of a payroll departments job is to be compliant with the various laws around wages and working hours. Fundamentally, all staff should be paid fairly for the time they work, and it’s the payroll department’s responsibility to keep on top of this.

To do this, a payroll department needs to keep on top of a few areas the first being:

Minimum Wage Laws

As of April 1^st, 2024, the National Minimum Wage and National Living Wage will be raised to the rates below:

• Age 21 or Over (National Living Wage): £11.44
• Age 18 to 20: £8.60
• Under 18: £6.40
• Apprentice: £6.40

The current rates will change

• Age 23 or Over (National Living Wage): £10.42
• Age 21 to 22: £10.18
• Age 18 to 20: £7.49
• Under 18: £5.28
• Apprentice: £5.28

It’s the payroll department’s responsibility to keep on top of changes like this, and to work with senior staff to ensure staff are paid the right amount. The UK government usually updates their minimum wage allowances each year, and it’s the payroll department’s job to keep an eye on this.

Complying with Overtime Regulations

In the UK, employers don’t have to pay employees for working overtime. Employees should look at what is stated in their employment contract, as this will outline what they are entitled to.

Some contracts may indicate there is compulsory overtime, however, even if this is the case, you can’t legally work more than 48 hours per week in the UK.

Tax Compliance

Keeping on top of tax laws can be exhausting for businesses and payroll departments everywhere. In the UK, tax laws can change at the drop of a hat, including tax rates, thresholds, allowances and reporting requirements. It’s incredibly important for payroll departments to stay ahead of the curve, and work out how changes will impact payroll calculations, deductions, and reporting obligations.

But what happens when a business is non-compliant? Well, we hate to be the bearer of bad news but it can come with some heavy penalties.

Penalties for Non-Compliance

• Late filing: if you fail to submit payroll reports like Real-Time (RTI) Submissions, you could be hit with a financial penalty. The amount increases based on the number of late submissions and the size of the business, so make sure to be wary of this slip up. The monthly payment penalty ranges from £100 to £400 a month, which can quickly stack up, so make sure to be on the ball!
• Underpayment of Taxes: yep you guessed it, incorrect calculations, or underpayment of taxes, (think income tax or National Insurance contributions), can lead to penalties and interest charges. HMRC may conduct audits on companies over a certain size to identify and rectify underpayments.
• Inaccurate Reporting: if businesses provide inaccurate or incomplete information on payroll reports it can also result in penalties for errors or omissions. It’s fundamentally down to the payroll team or manager to ensure the accuracy of payroll data submitted to HMRC.

• Failure to Comply with Auto-Enrolment: employers must comply with auto-enrolment requirements for workplace pension schemes, including enrolling eligible employees, making contributions, and providing statutory communications. Failure to comply can result in fines and legal action, so it pays to be prepared.

Record-Keeping

And to make sure they stay compliant with all the elements mentioned, businesses must keep an accurate set of records.

How do businesses do that? By using reliable payroll software, maintaining detailed employee records, documenting payroll transactions, retaining records for legal compliance, conducting regular reconciliation and audits, and providing training to payroll staff. Sticking to these practices means businesses can ensure accuracy, remain compliant and most importantly, avoid any nasty fines from our good friends HMRC.

Employee Benefits and Payroll

Employee benefits are now more important than ever. Employers are expected to offer more to entice people to their business, from health insurance through to company cars. For businesses in the UK, the option to integrate benefits into the payroll process provides a seamless experience for employees.

By managing benefits through the payroll system, businesses can automate the enrolment process, track employee contributions, and ensure accurate deductions from employee paychecks.

It’s super important that business owners understand the tax implications of employee benefits, as some benefits will be tax-deductible and others won’t.

Health insurance is generally tax-deductible as a business expense, which can save businesses their hard-earned cash. However, some employee benefits, like staff parties unfortunately aren’t tax deductible.

As a result, it’s incredibly important for business owners to double-check by speaking to a tax expert to discuss the tax implications of employee benefits.

Retirement Plans

In the UK, retirement planning is an incredibly important part of employee benefits, offering the financial security for employees once they finish working for good. Pensions come in different varieties, and each employer will offer different options to their staff.

Overview of Retirement Plan Options

Workplace Pensions: the most common type of pension in the UK, these are set up by employers and require contributions from both the employer and employees. These pension schemes operate using auto-enrolment, meaning employees who are eligible are enrolled unless they choose to opt-out.

Personal Pensions: employees may also have personal pensions, which generally aren’t tied to their job and can be moved around. This means employees can contribute to their personal pension pot independent of their workplace pension. This also means they come with higher levels of flexibility in relation to levels of contribution and what they invest their pot into.

Employer contributions and payroll considerations

Under auto-enrolment rules, employers have to make minimum contributions to each employee’s workplace pensions. This is calculated based off the employees’ qualifying earnings and is reviewed by the government annually. Employees can also make voluntary contributions as part of their overall benefits package which is often used by businesses to incentivise employees to save extra mullah for their retirement pot.

The tax treatment of both the employer and the employee contributions to a pension must be considered, but a payroll department worth its salt will account for this.

Employer contributions are usually tax-deductible as business expenses, whereas employee contributions are generally made on a pre-tax basis, which reduces the employee’s taxable income.

But don’t worry there’s no need to get bogged down in the details. A solid payroll system managed by payroll professionals will help calculate and keep track of these elements, giving business owners the peace of mind to run their business.

Conclusion

So there you go, a comprehensive guide to all things payroll, for both employers and employees. In this guide, we’ve covered the importance of accurate record-keeping, compliance with tax regulations and integrating employee benefits into payroll systems. It’s clear, payroll plays a vital role in keeping a business’s wheels turning. Left unmanaged, it can cause all kinds of operational and HR-related issues. Fundamentally, people want to get paid – on time and the right amount. Not prioritising payroll management leaves businesses at risk of alienating staff, incorrectly paying taxes and leaving the business open to hefty fines.

It’s not to be taken lightly, but it’s reassuring to see businesses now fully appreciate the importance of the payroll department.

If you’d like to hear how our payroll team could help your business, get in touch.