Payroll Basics

18 October 2017

Setting up payroll

First we need to apply to HMRC to register your limited company as an employer.

Once HMRC have approved the application (usually takes 2 weeks) then they will send the following two pieces of information:

  • PAYE (Pay As You Earn) Reference Number – Unique PAYE reference number allocated to your limited company.
  • Accounts Office Reference Number – This is used for making payments of PAYE tax or national insurance to HMRC – it ensures that the payments get allocated against your company.

Once we receive the above, the next step is getting a HMRC authorisation code in place.

This code allows us to electronically transmit the monthly payslips to HMRC and speak to them on your behalf should there ever be any issues. The code usually arrives in around 7-10 days.

Once the code arrives, we enter it into our systems and we’re ready to run payroll.

When does payroll need submitted?

Payroll is transmitted to HMRC once per month and the deadline for submission is generally the 5th after the end of the month. For instance, if you received a payslip on 31 October, the deadline to transmit it to HMRC is 5th November.

What is the difference between gross and net salary?

Gross is your salary before any taxes are deducted. If you were looking for a new job and reviewing the salary levels on offer, these would always be quoted gross.

Net salary is what hits your bank account after all taxes are deducted.

What are the different types of payroll taxes?

The employee pays PAYE tax and Employees National Insurance. If you wanted to calculate net pay:

Gross Salary – PAYE tax – Employees National Insurance.

The company pays Employers National Insurance, which is why you will normally not see this appearing on your payslip.

  • PAYE tax – this is the normal tax on your income (either 20% or 40%). The government allocates this tax against different areas of the public sector (police, education, infrastructure etc.). Paid by the employee.
  • Employees National Insurance – usually ringfenced to fund welfare services like the NHS, state pension contributions etc. Paid by the employee.
  • Employers National Insurance – as above. Paid by the company.

Note that if there is more than 1 employee on the payroll, HMRC allocate you an allowance of £3,000 tax free Employers National Insurance.

Understanding the tax code

Tax codes are a complicated area and would require a standalone blog to fully explain everything, so we’re just going to cover the basics.

The tax free personal allowance for 16/17 is £11,500 and the standard tax codes for the 16/17 tax year are:

  • Scottish taxpayers: S1150L
  • English taxpayers: 1150L

You can see that the tax code is just your tax free personal allowance with one “zero” chopped off the end.

If you had a tax code of 789L, you would know that HMRC have allocated this after any adjustments for things like benefits in kind, underpaid tax from previous years etc. HMRC usually send a letter in the post explaining your tax code.

As we know the tax codes are basically your personal allowance with a zero off the end, just add a zero to 789 and you know your remaining tax free personal allowance would be £7,890.

How the tax code is applied

HMRC will try to allocate you a tax code where PAYE tax is taken off as equally as possible over the year based on your annual salary. Tax codes are also used to adjust for any under/overpayments of tax.

For example, if it was April and you had underpaid tax by £100 for the previous tax year, HMRC would alter your tax code to collect an extra £8.33 (£100 / 12 months) each month to make up the underpayment.

The same applies if you had overpaid your tax, HMRC would adjust your tax code so you paid less monthly PAYE tax.

If you had a P11D benefit in kind last tax year, it’s also likely that HMRC would adjust your tax code to reflect the prior year amount and collect this equally over the year.

If you know you had no P11D benefits in the next tax year (you may have moved job for example), you can simply phone HMRC and they will alter the tax code for you.

Conclusion

Payroll is an extremely broad topic and there are a lot of things that we’ve not covered today, however this blog should serve as a good introduction to the basics.

Do you need more information about setting up a payroll?

Follow this link to contact the team at Source Accounting to find out more.

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