Top tips for a healthy payroll

Running your payroll should be a straightforward procedure, you’d agree? You’ll understand the basic process of getting payroll set up: registering for your PAYE (Pay As You Earn) number, getting the approval from HMRC for your application, deciding on software, entering the pay details for your staff and there you are.

With this done you’ll then receive your payroll summary and payslips for employees.  All that is left to do then is to make payments to your staff (net pay) and to HMRC for tax and national insurance.

However, in reality payroll can be difficult to manage, and errors can be costly and create emotional wear and tear for business owners.

So, if you want to be sure you’re getting it right, and by improving how your payroll is run, you’ll reduce your stress, and your employees and HMRC will be happy.

Over reliance on payroll software

Because payroll is complex, payroll people take exams and become members of the CIPP (Chartered Institute of Payroll Professionals). Any payroll system used can only be as good as the person using it. Ensure that all relevant data is entered so that the system can calculate everything correctly, and use a checklist and do reasonableness checks.

Use correct tax codes

Each tax year individuals get their tax free allowance. This is converted into a tax code to enable employers to pay their staff the right amount of pay. However, there are occasions where HMRC may adjust your employee’s tax code.

For instance, an employee may owe tax from previous year, or have a second job.  They may also receive benefits from you. If their tax code is incorrect and doesn’t get picked up or you fail to use the correct tax code, it means they may have an over or underpayment of tax. Make sure you use the correct tax codes!

Review and report tips and gratuities as earnings

A mistake some employers in the hospitality industry make is to assume incorrectly that they do not need to run PAYE on tips and gratuities. The tax treatment depends on the specific arrangement regarding the distribution of the tips.

Where the employer is involved in the distribution of the tips, then they need to include the amounts on the payroll. Where employees receive the tips directly from customers, then the employees would need to declare this on their own tax return and the employer does not need to run payroll. This is an area you will need to take further advice on.

 Appreciate these payroll risk areas

The following five areas are known to cause major headaches and errors when running your payroll.

• Pensions and Student loans
• Statutory Maternity Pay (SMP)
• Statutory Sick Pay (SSP)
• Share Schemes
• Termination Payments

With termination payments, SMP and SSP, it’s really important to ensure that the qualifying conditions are met. Always seek specialist advice before proceeding.

Understand the minimum wage legislation

By not observing the minimum national wage, it’s not only the employee who is affected and might bring a claim - HMRC has been known to bring cases successfully against employers who pay below the minimum wage. HMRC do this because they too have a vested interest in the form of PAYE tax. So, the unsuspecting employer gets clobbered twice here.

Treat reimbursed personal bills the right way

Personal bills incurred by employees and directors (e.g. payment of credit card or utility bills) that are paid by the employer will normally be liable to tax and NI. The tax treatment depends on who the contract is with and how payment is made. So, where the contract is between the employee and the supplier, the employee pays the bill but then gets reimbursed by the employer, the full cost is treated as earnings (salary) for the purposes of tax and NI. And this needs to go on the payroll.

Get Benefits in Kind correct

Most benefits you give to your staff get taxed eg, car benefits, holidays, school fees, and medical insurance. At the same time, some expenses you pay on behalf of your staff also get taxed and subject to national insurance. However, the way these get taxed is not through the monthly payroll but through the Benefits in Kind system. A classic mistake here is forgetting to report and declare these benefits.

 Undertake an annual PAYE health check

You don’t have to pay tax on a benefit for your employee if all of the following apply:

• it cost you £50 or less for you to provide
• it isn’t cash or a cash voucher
• it isn’t a reward for their work or performance
• it isn’t included in their contract terms

You also don’t have to pay tax if you spend £150 per head per year on staff functions.

Very often businesses don’t take the time to review these trivial benefits and staff functions, but they will be a problem if they are picked up during a routine PAYE visit by the HMRC. To make sure this doesn’t happen it is a good idea to conduct a PAYE health check every year within your payroll services.

In addition to the above, please make sure you do all your tax filing on time to avoid penalties.  I hope these examples are helpful and that your payroll management will avoid such mistakes in the future. That way you, you team, and HMRC will all be happy!

 

Jonathan Amponsah CTA FCCA is an award winning chartered tax adviser and accountant who advises business owners on entrepreneurial tax reliefs. Jonathan is the founder and CEO of The Tax Guys.