Why payroll is important for your business

Close up of payroll summary detail with figures and euro

Payroll is very important for your business the moment you have at least one employee, which could be you as business owner (i.e. director of a limited company) or anyone else who works for you as an employee and is paid a salary. You could try to run payroll yourself using some payroll software, but this may prove to be quite a challenge because of the complexity of this requirement. Nevertheless, even though you decide to outsource your payroll, it is still important to understand how it works.

In this blog, I will detail and clarify the most relevant aspects of payroll which every business owner may want to familiarize with.


What exactly is payroll ?

Historically, payroll refers to a list of all your employees and how much each of their wages is. In reality, payroll means much more than that: it is the actual process of managing your employee’s wages, which has become quite complex in the age we currently live in.

Nowadays each business must run an accurate payroll which accomplishes the following:

  • It calculates each employee’s wage
  • It issues each employee a payslip every time they get paid
  • It manages bonuses and benefits for each employee
  • It calculates each employee’s pay for time not actually worked but for which they are owed money such as annual leave, sickness, maternity or paternity leave, etc
  • It calculates each employee’s NIC (National Insurance Contribution) and income taxes owed to HMRC
  • It integrates the private pension which at least in Scotland is a requirement for every employer to add to each employee’s payroll
  • It maintains all financial records for each of these tasks

These important tasks of payroll may look overwhelming for any business owner because they not only involve a lot of work, but they also have to be carried out in compliance with strict HMRC regulations abiding by strict formats and time-frames. This is why many businesses outsource payroll to an accounting firm.


What is PAYE ?

PAYE (Pay As You Earn) is an essential part of payroll through which HMRC collects Income Tax and National Insurance Contributions from employment.

The PAYE bill is paid to HMRC at least once per month. You have to make sure you have the correct PAYE reference every time payment is sent to HMRC, because if the reference is wrong, then the payment will not be recognized, which is the equivalent of the bill not being paid. This may lead to HMRC issuing penalties and late filing charges.

Note that the number for your payment reference contains a unique character sequence for the type of tax you are paying and for the period of time the payment is for. By these, HMRC recognizes the payment type and payment period and allocates it right away. As each tax period has a different payment reference it’s important to make separate payments for each period. For the current period, you only need your PAYE Accounts Office Reference. However, if the payment relates to another period than the current one, then you need to add four extra characters at the end of the PAYE Accounts Office Reference. If in doubt about which characters to add to the payment reference, you can use the “Pay now” tool that HMRC provides in order to find out the correct character sequence.


What are the first things to do to set up payroll for your business ?

As an employer, you have to register with HMRC for PAYE . Once your registration is complete, HMRC will issue you with two very important numbers: one is your PAYE reference as employer and the other is your PAYE Accounts Office Reference. Both these numbers are important, because you will need them in order to file your payroll data with HMRC, which is a legal requirement.

Please note that you do not have to register for PAYE if none of your employees are paid more than £123 per week, they get expenses and benefits, or they have another job or get a pension. You still have to keep payroll records for them though.


Do I need an accountant to run my company’s payroll ?

You can run your payroll in-house or you can outsource this to an accounting firm.

As mentioned above, payroll may look overwhelming for any business owner because it not only involves a lot of work, but it also has to be carried out in compliance with strict HMRC regulations abiding by strict formats and timeframes. If payroll is run by an employee, problems arise when this employee goes on annual leave or falls ill.

Payroll can be gruesome for a non-specialist to run, especially that it requires the highest degree of accuracy. It also implies responsibility, because every employee counts on their wages to be calculated correctly and their income tax and National Insurance Contributions be paid to HMRC accurately and in timely fashion.

This is why many businesses outsource payroll to an accounting firm. It is one of the most cost-efficient services to be outsourced.

Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the tax advice you need.

Don’t hesitate to get in touch for any further enquiries at: info@las-accounting.co.uk

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