Bookkeeping & Accounting All-in-One For Dummies (2015)
Undertaking Monthly and Quarterly Tasks
Employee Payroll and Benefits
In This Chapter
Preparing to pay your employees
Operating the new real-time information system
Dealing with benefits
Paying HM Revenue & Customs
Unless your business employs just one person (you, the owner), you probably need to hire employees, and that means that you have to pay them, offer benefits and manage a payroll.
Human resources staff and bookkeeping staff usually share responsibilities for hiring and paying employees. As the bookkeeper, you must make sure that all HM Revenue & Customs tax-related forms are completed, and you need to manage all payroll responsibilities including paying employees, collecting and paying employee taxes, collecting and managing employee benefit contributions and paying benefit providers.
Before you proceed any further, visit the HM Revenue & Customs website at www.hmrc.gov.uk and click on the Employers link to go to the help area for new employers. There’s a wealth of information to assist you in setting up a payroll and what to do on an ongoing basis. Alternatively, phone the Employer Helpline on 0300 200 3200 and let them talk you through the process.
This chapter examines the various employee staffing issues that bookkeepers need to be able to manage.
Staffing Your Business
After you decide that you want to hire employees for your business, you must be ready to deal with a lot of official paperwork. In addition to paperwork, you’re faced with many decisions about how employees are to be paid and who’s going to be responsible for maintaining the paperwork that HM Revenue & Customs requires.
Knowing what needs to be done to satisfy these officials isn’t the only issue you must consider before you hire the first person; you also need to decide how frequently you’re going to pay employees and what type of wage and salary scales you want to set up.
Obtaining an employer’s PAYE reference
Every business must have an employer’s Pay As You Earn (PAYE) reference in order to hire employees. Without this reference, you can’t legally pay staff and deduct PAYE tax and National Insurance Contributions (NICs).
Luckily, HM Revenue & Customs makes it straightforward to obtain an employer’s PAYE reference, which is typically a three-digit number (to identify the tax office) followed by four alpha characters (to identify the employer). The fastest way is to call HM Revenue & Customs’ Employer Helpline on 0300 200 3200 and complete the form by telephone. Be prepared to provide the following information:
· General business information: Business name, trading address, name and address of employer, National Insurance number and Unique Taxpayer Reference of employer, contact telephone number, contact email address if registering using email and nature of business.
· Employee information: The date you took on (or intend to take on) your first employee(s), how many employees you intend to have, the date you intend to pay them for the first time and how often you intend to pay them.
If your business is a partnership or a limited company, you need to give additional information:
· Partnership: Names and addresses of any business partners, National Insurance numbers and Unique Taxpayer References of any business partners and your LLP number if you’re a Limited Liability Partnership (LLP).
· Limited company: The company’s registered address, company registration number and date of incorporation; and the names, addresses, private telephone numbers, National Insurance numbers and Unique Taxpayer References of the company directors.
Note: You can now register as a new employer online. A few exceptions exist, so check the website and follow the online instructions. Click on the Employers tab on the HM Revenue & Customs website at www.hmrc.gov.uk , followed by the ‘I want to register as an Employer’ link.
After you register, you receive an employer’s registration letter, which includes your accounts office reference and your PAYE reference. This is a particularly important document, so keep it safe! You use your accounts office reference when you make payments to the HM Revenue & Customs and your PAYE reference in all other contact with HM Revenue & Customs. The letter includes a web address giving you access to the Getting Started guide, which can help you begin your payroll.
Starting a new employee
Every person you hire should bring a P45 from her previous employer. The P45 is a record of the employee’s taxable earnings, PAYE deducted and tax code for the current tax year. This form gives you the information you need as the new employer to make sure that you can deduct the correct amount of PAYE and National Insurance from the new employee.
It’s no longer necessary to submit P45 parts to HM Revenue & Customs. You simply include the new start information as part of your Full Payment Submission (FPS), which is the submission that you must make every time you pay your employees.
Many new employees don’t have P45s, perhaps because they’ve lost the form, or this is their first job, or maybe they’re keeping another job as well as working for you. You need to obtain the following information from a worker without a P45:
· Full name
· Date of birth
· Full address including post code
· National Insurance number (if known)
Some employers may find it easier to use the HM Revenue & Customs’s Starter Checklist, which replaces the old form P46. You can download this form from the Employers section on the HM Revenue & Customs website. The form asks questions such as whether this is your first job, whether you have any other job, whether you claim Job Seekers’ Allowance and whether you’re paying off a student loan. The checklist should be completed by the employee and handed to the new employer, not sent to HM Revenue & Customs.
Picking pay periods
Deciding how frequently to pay your employees is an important point to work out before hiring staff. Most businesses choose one of these two pay periods:
· Weekly: You pay employees every week, which means you must do payroll 52 times a year.
· Monthly: You pay employees once a month, which means you must do payroll 12 times a year.
You can choose to use either pay period, and you may even decide to use more than one type. For example, some businesses pay hourly employees (employees paid by the hour) weekly, and pay salaried employees (employees paid by a set salary regardless of how many hours they work) monthly.
Determining wage and salary scales
You have a lot of leeway regarding the level of wages and salary that you pay your employees, but you still have to follow some rules laid out by the government. Under the National Minimum Wage Regulations, employers must pay workers a minimum amount as defined by law. These rules apply to businesses of all sizes and in all industries.
The levels of minimum wage rates from October 2014 are as follows:
· £6.50 per hour for workers aged 21 years and older
· £5.13 per hour for workers aged 18 to 20 years old
· £3.79 per hour for workers aged between 16 and 17
· £2.73 per hour for apprentices
Don’t assume that the minimum wage isn’t going to change, though: check the HM Revenue & Customs website periodically to get the current wage rates.
Making statutory payments
As well as guaranteeing minimum wage payments for workers, government statutes provide other benefits:
· Sick pay: Employees who are off sick for more than four consecutive work days, known as a period of incapacity for work (PIW), are entitled to receive Statutory Sick Pay (SSP). Of course, a sick employee must inform you as soon as possible and supply you with evidence of her sickness.
In many cases, the business continues to pay employees for short periods of sickness as part of good employment practice. However, if you don’t pay employees when they’re off sick for more than four days, they can claim SSP, which is based on their average earnings. As an employer, you may be able to recover some of the SSP you’ve paid against your NIC amounts. (Note: The first three days that the employee is away from work are called waiting days and don’t qualify for SSP.)
Different employment types, such as casual employment or term-time employment, may affect the rates that are paid.
· Parental pay: If employees qualify for Statutory Maternity Pay (SMP), they’re paid for a maximum of 39 weeks. For the first six weeks, an employee is entitled to 90 per cent of her average wage. For the other weeks, she’s entitled to £138.18 per week or 90 per cent of average earnings if this amount is less than £138.18.
New dads are entitled to Statutory Paternity Pay (SPP). The statutory weekly rate of Ordinary Paternity Pay and Additional Paternity Pay is £138.18 per week.
Most employees who adopt children are entitled to Statutory Adoption Pay (SAP), which is payable for up to 39 weeks at the lower rate of £138.18 per week or 90 per cent of average weekly wages if this amount is less.
All these statutory payments are offset against the NICs that the business has to pay over each month. For example, if the business was due to pay over £1,000 in NICs but paid out recoverable SSP of £108.85, it makes a net payment of £891.15. The payslip has room for you to show this adjustment. For more information on statutory benefits, visit www.gov.uk .
Using the Real-Time Information System
From April 2013 businesses have to report their payroll information in real time. That means that HM Revenue & Customs collects PAYE information more regularly. A business reports PAYE, NICs and student loans information every time it pays its employees, and not just annually when it provides an end-of-year tax return.
One of the key reasons for introducing the RTI system is to support the introduction of Universal Credits, which will overhaul the state benefits system by simplifying benefits into one payment. The RTI system will provide the Department of Work and Pensions with up-to-date information about the claimants’ employment income. The claimant will no longer have to provide the information herself. The idea is that fraud will be reduced and people will receive the money that they’re entitled to.
One of the main changes with this new system is that employers no longer have to submit P35s and P14s at the year-end. The following sections introduce to the basics of the RTI system.
Operating your RTI payroll system
All payroll software now uses the RTI processing system. Although PAYE is operated in the same way, the reporting process has changed. You must submit the payroll information to HM Revenue & Customs on or before the day that you pay the employee. This means that if you have a combination of weekly and monthly staff payments, you must make a Full Payment Submission (FPS) for each payment.
Many different payroll systems are on the market, some free and others not, but all must enable you to operate the RTI and submit your payroll details online. HM Revenue & Customs provides a free Basic PAYE Tool that enables you to process your payroll online. It also offers a list of HM Revenue & Customs-recognised payroll systems that you can review. Go to www.hmrc.gov.uk and click on the Employers tab, followed by ‘Tell me about . . . Software packages and other payroll options’.
Your chosen payroll software enables you to submit the following required reports:
· Full Payment Submission (FPS): This is one of the new forms used to report the payment information to HM Revenue & Customs. Prior to submitting this information, your payroll system asks for the following information:
· Starter and leaver information
· The employee’s full name
· Employee National Insurance number
· Tax code
· Employee address
· Payment information
· PAYE and NICs
HM Revenue & Customs uses the data that you’ve submitted to calculate the PAYE and NICs liability due in each tax month.
· Employer Payment Summary (EPS): You submit an EPS only when you need to advise HM Revenue & Customs of an alteration to the PAYE and NICs liability; for example, if the business made no payment to an employee in that pay period. You can also use the EPS to recover statutory payments and Construction Industry Scheme (CIS) deductions suffered.
In addition, you may need to make other submissions during the course of the payroll year.
· Employer Alignment Submission (EAS): This is only required by employers with more than 250 employees and where two or more payroll systems may be in operation. The purpose of the EAS is to align the employee records to the HM Revenue & Customs records before the employer submits any other information.
· National Insurance Verification (NVR): When you set up a new employee, you may need to verify the National Insurance number to ensure it’s correct. An incorrect NI number can result in the employer deducting the wrong amounts of National Insurance from an employee, which can subsequently affect her state pension and/or her entitlement to benefits.
If you don’t have a National Insurance number for an employee then when you send your first FPS that includes payment details for that individual you must leave the National Insurance number blank.
You can’t submit an NVR until you’ve sent at least one FPS and started submitting payroll reports in real time. HM Revenue & Customs recommends that you wait at least two weeks after sending your first FPS before you submit an NVR.
· Earlier Year Update (EYU): You can use this report after 19 April to correct any previous year-to-date totals submitted in your final FPS for the previous tax year. It applies only to the years after you started to send submissions in real time.
Collecting Employee Taxes
As the bookkeeper, you must be familiar with how to calculate the PAYE tax and NICs that you must deduct from each employee’s wage or salary.
Although you can run a manual payroll, the calculation of PAYE and NICs is a monumental nightmare, demanding the most accurate and methodical approach to using the tables that HM Revenue & Customs provides each tax year. As well as getting the calculations correct, you have to record this information on a Deductions Working Sheet for each employee, which is very time consuming.
Save yourself a lot of grief and use a payroll bureau to run your weekly and monthly payroll and end-of-tax-year returns. If you employ more than 30 employees, this method saves you a lot of time and the cost isn’t all that high. If you employ fewer than 30 employees and have the time to spare, use the P11 Calculator that HM Revenue & Customs provides online as part of the Basic PAYE toolkit, or buy an off-the-shelf payroll package.
NICs are made up of two elements:
· Employee contributions, which you deduct from your employees’ pay
· Employer contributions, which your business must pay
Several different categories of NICs exist depending on the employee’s age and sex. For most men aged 16 or over and under the male state pension age and most women aged 16 or over and under the female state pension age, you use Category A, which is referred to later as Table A. If you’re unsure about which category your employee falls into, contact your local HM Revenue & Customs office or go to the website at www.hmrc.gov.uk .
Each year HM Revenue & Customs sets new Lower Earnings Limits (LEL) below which no NICs are payable by an employee. It also sets an Upper Earnings Limit (UEL) above which no more NICs are payable.
The employer pays NICs when the employee’s earnings exceed the Secondary Threshold (ST – currently £153 weekly or £663 monthly). The employee pays NICs when her earnings exceed the Primary Threshold (PT – currently £153 weekly or £663 monthly).
Employers and their employees who are members of a contracted-out state pension scheme pay a reduced NIC contracted-out rate up to the Upper Accrual Point (UAP) – which is currently £770 weekly or £3,337 monthly. They then pay NICs at a higher standard rate on employee earnings between the Upper Accrual Point and the Upper Earnings Limit.
For the latest information about NICs check the HM Revenue & Customs website at www.hmrc.gov.uk .
Figuring out PAYE tax
Deducting PAYE tax is a much more complex task for bookkeepers than deducting NICs. You have to worry about an employee’s tax code (of which numerous permutations exist) as well as using Table A to calculate the final tax figure to deduct.
A tax code is usually made up of one or more numbers followed by a letter. The number indicates the amount of pay an employee is allowed to earn in a tax year before tax becomes payable. For example, an employee with a tax code of 1000L can earn £10,000 in the current tax year before becoming liable to pay any tax at all.
A letter follows the number part of the tax code: L, P, T, V or Y. The letters show how the tax code is adjusted to take account of any budget changes.
If the tax code is followed by week 1 or month 1 or an X, instead of keeping a running total of the pay to date, you treat each pay day for that employee as if it’s the first week or month of the tax year. For regular employees, you work on a running total basis of ‘total pay to date’ at each pay day.
Tax codes work on an annual cumulative tax allowance. For example, a tax code of 1000L means an employee can earn £10,000 tax free in a complete tax year (52 weeks or 12 months). If the employee is paid weekly, this tax-free sum adds up as the weeks go by. In this example, in week 1 the employee can earn £192.30 total pay without paying any tax (£10,000 ÷ 52). By week 8, that employee could have earned £1,538.46 total pay to date that year without paying any tax. Assuming that she’s been paid in each of the intervening weeks (1 to 7), these sums earned are deducted from the total year-to-date tax-free-earnings figure to calculate how much is taxable. All this information is provided in the tax tables that you can obtain from HM Revenue & Customs.
Finally, as if all this wasn’t confusing enough, an employee may have a totally different BR tax code, which stands for Basic Rate. For an employee with a BR tax code, you must deduct tax from all the pay at the basic rate – currently 20 per cent. The BR code can also be followed by a week 1 or month 1 or X, which indicates that you operate the code on a non-cumulative basis. Of course, if either week 1 or month 1 or X isn’t indicated, you work on a running-total basis of total-pay-to-date at each pay day.
If you don’t want to use manual tax tables, and you aren’t using payroll software, then the easiest and quickest way to work out the tax deduction is to use the HM Revenue & Customs basic PAYE tools. See www.hmrc.gov.uk/paye/tools/basic-paye-tools.htm .
Determining Net Pay
Net pay is the amount a person is paid after subtracting all tax and benefit deductions from gross pay.
After you figure out all the necessary PAYE and NICs to be taken from an employee’s wage or salary, you can calculate the pay amount, which is shown on the payslip. The equation you use is pretty straightforward:
· Gross pay – (PAYE + NICs) = Net pay
For a sample employee, the formula may look like this:
· Gross pay = £205.42
· Less: PAYE tax deducted – £9.80
· Less: Employee NICs – £7.13
· Net pay = £188.49
This net pay calculation doesn’t include any deductions for benefits. Many businesses offer their employees’ health insurance, pensions, company cars and other benefits but expect the employees to share a portion of some of those costs. Most benefits are liable to PAYE tax and NICs, whereas employee contributions to pensions and some other benefits are tax deductible. To get full details on which benefits are taxable and which aren’t, visit the HM Revenue & Customs website (www.hmrc.gov.uk) or ask your tax adviser.
Many businesses offer their employees a range of benefits as well as their wage or salary. These benefits may include perks like a company car, all fuel paid for, health insurance and a business pension scheme. However, most benefits are taxable, so the employee has to pay tax on the money on the value of the benefits received. Very few benefits are non-taxable.
Fortunately, the process of collecting this tax on benefits is very straightforward. Your business informs HM Revenue & Customs what benefits each employee receives each tax year as part of the year-end process using forms P9D, P11D and P11D(B) (see the later section ‘Handling Payroll Year-End’), and HMRC adjusts the employee tax code to ensure that you collect the tax due through the payroll. However, two benefits – company cars and fuel benefits – involve some additional work for you if you’re involved in the payroll.
The quickest and simplest way to calculate the value of these benefits is to use the Car and Car Fuel Benefit Calculator, which you can find on the HM Revenue & Customs website. Click the ‘Calculators and Tools’ link on the ‘Quick Link’ menu on the left side of the homepage. The calculator guides you through the whole process. Also, all the monthly car magazines include the taxable benefit figures in their rating for each car reviewed.
You’re responsible for working out the value of the company car benefit and telling HM Revenue & Customs. In simple terms, the car benefit charge is obtained by multiplying the list price of the car plus accessories less any capital contribution by the employee by the appropriate percentage. The appropriate percentage is based on the car’s approved CO2 emissions figure. The maximum appropriate percentage is 35 per cent, but you can adjust this amount depending on the type of fuel used and whether the car is electric or hybrid.
HM Revenue & Customs provides a useful helpsheet (number 203) entitled ‘Car benefits and car fuel benefits’ that enables you to complete your tax returns correctly using the worksheets provided.
If an employer pays for all the fuel for company car users, she can claim an additional taxable benefit called a fuel benefit charge for the non-business fuel used. Fortunately, this benefit is even simpler to calculate. You multiply the fixed sum of £21,100 (2014/2015 tax year) to the appropriate percentage used to calculate the car benefit. So if your car had an appropriate percentage (based on CO2 emissions) of 24 per cent, for example, then your taxable fuel benefit charge would be £5,064 (£21,100 × 24 per cent).
When you’ve calculated the taxable value of the company car and fuel benefit for an employee, you must inform HM Revenue & Customs so that it can issue you with a revised tax code for that employee to collect the extra PAYE and NICs due each month. You use form P46 (Car) to notify HM Revenue & Customs of any new company cars and fuel benefits, or any changes to these benefits.
Preparing and Posting Payroll
After you deal with deductions and taxes, you have to figure out your employee’s gross and net pay and post all the amounts in your journals.
Calculating payroll for hourly employees
When you’re ready to prepare payroll for your hourly paid employees, the first thing you need to do is collect time records from each person being paid hourly. Some businesses use time clocks and some use timesheets to produce the required time records, but whatever the method used, usually the manager of each department reviews the time records for each employee that she supervises and then sends those time records to you, the bookkeeper.
With time records in hand, you have to calculate gross pay for each employee. For example, if an employee worked 45 hours and is paid £12 an hour, you calculate gross pay as follows:
· 40 standard hours × £12 per hour = £480
· 5 overtime hours × £12 per hour × 1.5 overtime rate = £90
· £480 + £90 = £570
Doling out funds to salaried employees
You also must prepare payroll for salaried employees. You can calculate payments for salaried employees relatively easily – all you need to know is their base salaries and pay period calculations. For example, if a salaried employee is paid £15,000 per year and is paid monthly (totalling 12 pay periods), that employee’s gross pay is £1,250 for each pay period (£15,000 ÷ 12).
Totalling up for commission payments
Running payroll for employees who are paid based on commission can involve complex calculations. To show you a number of variables, in this section we calculate a commission payment based on a salesperson who sells £60,000 worth of products during one month.
For a salesperson on a straight commission of 10 per cent, you calculate pay using this formula:
· Total amount sold × Commission percentage = Gross pay
· £60,000 × 0.10 = £6,000
For a salesperson with a guaranteed base salary of £2,000, plus an additional 5 percent commission on all products sold, you calculate pay using this formula:
· Base salary + (Total amount sold × Commission percentage) = Gross pay
· £2,000 + (£60,000 × 0.05) = £5,000
Although this salesperson may be happier with a base salary that she can count on each month, in this scenario she actually makes less with a base salary because the commission rate is so much lower. The salesperson makes only £3,000 in commission at 5 per cent if she sells £60,000 worth of products. Without the base pay, she’d have made 10 per cent on the £60,000, or £6,000. Therefore, taking into account her base salary of £2,000, she actually receives £1,000 less with a base pay structure that includes a lower commission pay rate.
If the salesperson has a slow sales month of just £30,000 worth of products sold, the pay is
· £30,000 × 0.10 = £3,000 on straight commission of 10 per cent
· £30,000 × 0.05 = £1,500 plus £2,000 base salary, or £3,500
For a slow month, the salesperson makes more money with the base salary rather than the higher commission rate.
You can calculate commissions in many other ways. One common way is to offer higher commissions on higher levels of sales. Using the figures in this example, this type of pay system encourages salespeople to keep their sales levels over a threshold amount to get the best commission rate.
With a graduated commission scale, a salesperson can make a straight commission of 5 per cent on the first £10,000 in sales, 7 per cent on the next £20,000 and 10 per cent on anything over £30,000. The following is what the salesperson’s gross pay calculation looks like using this commission pay scale:
· (£10,000 × 0.05) + (£20,000 × 0.07) + (£30,000 × 0.10) = £4,900 Gross pay
One other type of commission pay system involves a base salary plus tips. This method is common in restaurant settings in which servers receive a basic rate per hour plus tips.
Businesses must pay the minimum wage plus tips (the minimum wage is currently £6.50 for employees over 21 years of age). There’s a useful guide at www.gov.uk called ‘Tips at Work’.
As an employer, you must report an employee’s gross taxable wages based on salary plus tips. Here’s how you calculate gross taxable wages for an employee whose earnings are based on tips and wages:
· Base wage + Tips = Gross taxable wages
· (£3 × 40 hours per week) + £300 = £420
Checking this employee’s gross wages, you see that the hourly rate earned is £10.50 per hour.
· Hourly wage = £10.50 (£420 ÷ 40)
PAYE and NICs are calculated on the base wage plus tips, so the net payment you prepare for the employee in this example is for the total gross wage minus any taxes due.
Posting your payroll entries
After calculating the take-home pay for all your employees, you prepare the payroll, make the payments and post the payroll to the books. In addition to the Cash account, payroll impacts many accounts, including
· Accrued PAYE Payable, which is where you record the liability for tax payments
· Accrued NICs Payable, which is where you record the liability for NICs payments
When you post the payroll entry, you indicate the withdrawal of money from the Cash account and record liabilities for future cash payments that are due for PAYE and NICs payments. To give you an example of the proper setup for a payroll journal entry, we assume the total payroll is £10,000 with £1,000 each set aside for PAYE and NICs payable. In reality, your numbers are sure to be different, and your payments are likely to never all be the same. Table 2-1 shows what your journal entry for posting payroll looks like.
Table 2-1 shows only the entries that affect the take-home pay of the employees. The business must also make employer NICs payments. Your payroll system will calculate this amount for you. Employer NICs is a cost of employment and therefore must be treated in the books in exactly the same way as gross salaries and wages. Table 2-2 shows the journal entry to record employer NICs payments.
Table 2-1 Payroll Journal Entry for 26 May 2014
Gross salaries and wages expense
Accrued PAYE payable
Accrued NICs payable
Cash (net payment)
In this entry, you increase the Expense account for salaries and wages as well as all the accounts in which you accrue future obligations for PAYE and employee NICs payments. You decrease the amount of the Cash account; when cash payments are made for the PAYE and NICs payments in the future, you post those payments in the books. Table 2-3 shows an example of the entry posted to the books after making the PAYE withholding tax payment.
Table 2-2 Employer NICs Expenses for May
Employer NICs expense
Accrued employer NICs payable
Table 2-3 Recording PAYE Payments for May
Accrued PAYE and NICs payable
Settling Up with HM Revenue & Customs
Every month you need to pay over to HM Revenue & Customs all the PAYE and NIC amounts you deduct from your employees. To work out what you have to pay HM Revenue & Customs, add together
· Employee NICs
· Employer NICs
· PAYE tax
· Student loan repayments
These payments must be made to HM Revenue & Customs by the 19th of the following month if you're paying by cheque, or the 22nd of the month if you pay electronically. A special concession exists for small businesses to pay quarterly (5 July, 5 October, 5 January and 5 April) if the average monthly payment of PAYE and NICs is less than £1,500.
Outsourcing payroll and benefits work
If you don't want to take on payroll and benefits, you can pay for a monthly payroll service from the software company that provides your accounting software. For example, Sage provides various levels of payroll services. The Sage payroll features include calculating earnings and deductions, printing cheques or making direct deposits, providing updates to the tax tables and supplying the data needed to complete all HM Revenue & Customs forms related to payroll. The advantage of doing payroll in-house in this manner is that you can more easily integrate payroll into the business's books.
Handling Payroll Year-End
With the introduction of RTI, a much more simplified approach exists to the year-end. You no longer need to produce a P35 or P14, but you do have to produce a P60 for each employee.
You follow three steps:
1. Enter the details of your final Full Payment Submission. This will usually be the March payroll or last week's payroll for the tax year. Before you send this information, be sure that you've sent all previous submissions and that they were received successfully. Your payroll system should be able to help you achieve this.
2. Confirm that this is your final submission for the tax year and then answer the additional questions required for the final submission. These are the same type of questions that you'd have answered on the now redundant P35 form.
3. Submit your final submission.
As part of year-end payroll, you also issue each employee with a P60 form, which is a summary of payroll information for the tax year, including total tax and National Insurance deductions. The deadline for issuing this information is 31 May.
Tell employees to keep this document in a safe place, because it provides proof of income for that tax year. Mortgage companies may ask for this when employees are taking out a new mortgage or loan.
You use the following forms to report benefits provided to employees during the tax year:
· P11D: You use this form to report to HM Revenue & Customs any expenses or benefits paid to an employee who earns more than £8,500 per annum. You include items such as a company car, medical insurance and interest-free loans. If an employee was to apply for a loan or mortgage, she could use the P11D as proof of additional income.
· P9D: This form reports to HM Revenue & Customs any benefits or expenses paid to an employee who earns less than £8,500.
Add together pay and expenses and benefits to determine whether the employee is over or under the £8,500 threshold. If an employee works only part time, you should prorate the £8,500 threshold accordingly.
· P11D(b): Complete this form if you prepare more than one P11D. The form provides the total value of expenses and benefits that you've provided to your employees during the tax year that are liable to Class 1A NICs.
You must send all these forms to HM Revenue & Customs by 6 July.
Have a Go
1. Design a payroll checklist to help you complete your monthly payroll routine.
2. Design a timesheet (you can use a spreadsheet for this) to calculate the gross pay for the following employee:
o Name: Deborah Donaghue
o Department: Fixings
o Paid: Weekly
o Hours: 45
o Hourly rate: £12
o Overtime: 6 hours
o Overtime rate: £16
3. Joe Carey is a new starter at your company. He doesn't have a P45 and has told you that he already has another part-time job. What tax code do you put him on when he starts?
4. You have a new sales director, Elaine Moore, starting this month. You've been told that Elaine's being paid an annual salary of £52,000. How much would her gross pay be each month?
Answering the Have a Go Questions
1. A monthly payroll checklist would include the following items:
· Enter new starter details and set up new employees (if required).
· Process any leavers for the period, and provide a P45 for the employee.
· Using timesheets or another input mechanism to enter the pay details for the period.
· Check for any new tax codes to apply in the month, or any other legislation that may require a tax code change (for example, changes in the national budget).
· Calculate the tax and National Insurance due (if using a manual system).
· Write or print out your payslips.
· Print out any other payroll reports that you require for your records.
· Ensure that you take adequate backups of your payroll data. (If using a system such as Sage Payroll, we recommend taking a backup before updating the payroll and also after updating. This gives you an opportunity to restore the payroll, if someone has made a mistake, and re-run the update.)
· Update your payroll if you're operating a computerised system.
· Calculate the PAYE and National Insurance due to HM Revenue & Customs. Either raise a cheque or pay online, but you need to make sure that you're registered with HM Revenue & Customs to do this. See www.hmrc.gov.uk for further details about registering online.
· Ensure that you've submitted your payroll documents to HM Revenue & Customs (FPS and so on).
Design in a checklist format, so that you can tick each completed item as you go along. This is helpful if you work in a busy office and are likely to get interrupted as you're working: you can see where you've got up to and start from the appropriate point. You may want to have a list for both monthly and weekly payrolls.
2. Gross pay calculation for Deborah Donaghue:
45 hours @ £12 per hour
6 hours @ £16 per hour
Total gross pay:
3. Joe Carey hasn't provided you with a P45. Therefore, in order to process the payroll and give him a tax code that's suitable, you should complete a new-starter checklist (see the HM Revenue & Customs website for a copy).
The first section of the checklist allows you to enter Joe's personal contact details and the second section allows you to complete the employee statement, which has three different options. Because Joe's told you he has another part-time job, you tick Box C, which confirms that he has another job. You can check the HM Revenue & Customs website to see what tax code you should use for an employee without a P45. It confirms that the correct tax code to use if you select statement C is BR Cumulative (Basic Rate). This means that Joe pays Basic Rate tax on all the gross pay that you've calculated. This probably means that he pays more tax than perhaps he should, but the problem will be corrected when you receive the correct code for Joe from HM Revenue & Customs. At this point you generate a refund of tax (if applicable) in the following month's payroll, as long as you apply the new tax code.
4. The monthly gross pay for Elaine is
£52,000 ÷ 12 = £4,333.33
5. You apply the tax codes given to you from Elaine's P45.