Payroll ac­count­ing: What are its uses?

If you want to run a suc­cess­ful company, there will be many chal­lenges to overcome. Apart from the op­er­a­tion­al side of things, one of the main focuses is the bur­eau­crat­ic burden which will grow ex­po­nen­tially as long as your company does. Payroll ac­count­ing, for example, goes far beyond the timely pro­cessing of monthly salaries: Reporting re­quire­ments need to be complied with, and personnel master data must be main­tained without losing track of your employees. This is much easier said than done. There are many companies that decide to outsource payroll ac­count­ing to external service providers, and for good reason.

Payroll ac­count­ing deals with the recording, set­tle­ment and dis­tri­bu­tion of wages and salaries, as well as employees’ statutory and voluntary de­duc­tions. The purpose of this is to calculate the salary en­ti­tle­ment (gross and net) of all employees for the period in question. Ad­di­tion­ally, however, the results of payroll ac­count­ing serve as the basis for the cal­cu­la­tion of payroll costs, as well as the as­so­ci­ated social expenses in company ac­count­ing. Ac­count­ing documents include timesheets, work time-cards and em­ploy­ment contracts. UK employers are obliged to use the HMRC’s PAYE system where employees earn more than £118 per week as part of their payroll.

Payroll ac­count­ing includes the following tasks:

• Main­tain­ing personnel master data
• Run payroll by sending HMRC the relevant pay de­duc­tions
• Maintain employee forms and in­form­a­tion

Employers usually use an employee’s tax code and National Insurance category to calculate how much they need to deduct from pay. Payments on the PAYE system are usually due by the 19^th or 22^nd of a month (the latter date applies to elec­tron­ic payments). Companies may assign their own payroll numbers to each employee. Small and medium-sized en­ter­prises often use personnel in­form­a­tion systems (PIS) in their payroll ac­count­ing, while large companies usually use cor­res­pond­ing ERS (En­ter­prise Resource Planning) system modules.

The cost of payroll ac­count­ing doesn’t just depend on the size, but also on the kind of company. In par­tic­u­lar, the type of staff re­mu­ner­a­tion pays a major role here. If employees or workers are paid by the hour, and if overtime and working hours are paid ad­di­tion­ally for weekends, this results in a lot more work for the payroll ac­count­ing de­part­ment, compared to fixed salaries. The general personnel policy also affects the payroll ac­count­ant’s workload, as frequent additions and de­par­tures in the staff requires much more bur­eau­cracy than a constant workforce. But what are payroll ac­count­ing’s specific tasks and re­spons­ib­il­it­ies?

As mentioned above, a separate payroll account must be created and main­tained for each employee. This account will contain general in­form­a­tion about the person and their salary. In the case of an external payroll audit, the payroll account makes it easier for HMRC to check each person’s payroll tax de­duc­tions. Personal and salary in­form­a­tion that employers should collect about their staff should include:

The data they must collect from an employee to submit to the HMRC includes an employee’s National Insurance number, address, date of birth, their start date, their tax code and National Insurance category, student loan in­form­a­tion (where ap­plic­able), weekly hours and pay.

• Employee’s first and last name
• Gender
• Full address
• National Insurance number
• Job title
• Date of birth
• Starting date
• Payroll period
• Re­mu­ner­a­tion and type of re­mu­ner­a­tion (e.g. wage or com­mis­sion)
• Hours worked
• Student loan
• Withheld payroll taxes

In­di­vidu­al personnel account records may be kept by third parties, as long as the ac­count­ing format and pro­ced­ures used are in ac­cord­ance with the prin­ciples of proper ac­count­ing.

Each time an employer makes a payment through PAYE using the HMRC Full Payment Sub­mis­sion, they must report an employee’s National Insurance number, name, address, payroll ID, their pay and benefit de­duc­tions such as health­care or pension con­tri­bu­tions. For more guidance on how to report payroll in­form­a­tion, you can consult the HMRC website.

Most im­port­antly, the data must be stored and should be made available to the tax office at any time in a com­pre­hens­ive form. To this end, the tax au­thor­it­ies require a certain standard whether the records be trans­ferred elec­tron­ic­ally or in paper form.

For the duration of an employee’s time working at your company, payroll ac­count­ing is re­spons­ible for reporting, paying taxes and National Insurance con­tri­bu­tions on behalf of the employee. This can be done online through PAYE. A full list of due dates for filing these documents can be found here.

Re­gard­less of how the em­ploy­ment re­la­tion­ship has ended (ter­min­a­tion, end of contract, etc.), there are certain ob­lig­a­tions still in place for the payroll ac­count­ing de­part­ment. They are obliged to notify the HMRC that the employee is no longer working there.

All companies are obliged to prepare an end-of-year final report. These allow HMRC to verify benefits and expenses and confirm that taxes are paid at the correct rate. In some cases, employers may receive com­pens­a­tion if, for example, they’ve overpaid for their employees. Dif­fer­ences may occur where salaries or bonuses changed during a year. Final payroll reports are sent by April 5th and employers must hand a P60 to their employees. The P60 shows an employee how much they’ve earned in the last tax year

alongside a breakdown of taxes and National Insurance taken out.

As soon as a company employs people, they’re auto­mat­ic­ally obliged to perform payroll ac­count­ing. This is due to the no­ti­fic­a­tion ob­lig­a­tions pre­vi­ously mentioned to HMRC. Employers in the UK are required to issue payslips. There are some ex­cep­tions, for example, if a worker is a freel­an­cer or con­tract­or or they work in certain sectors such as the police force or share fishing.

Payroll ac­count­ing re­spons­ib­il­it­ies and tasks are extensive. Even in smaller companies, these tasks involve a great amount of time and effort. In par­tic­u­lar, accuracy is very important when creating re­mu­ner­a­tion state­ments. If there are errors, HMRC and health insurance agencies will quickly notice, and you could face penalties. Using an external service provider will ensure that your payroll ac­count­ing needs are being met to the highest pro­fes­sion­al standards.

The main advantage of having an external payroll ac­count­ing de­part­ment is the wealth of ex­per­i­ence these offer, since they are usually serving a large number of clients. Error-free payroll ac­count­ing is always in their interests, so they will always strive to be up-to-date with current le­gis­la­tion. A good re­la­tion­ship between a company and their external payroll provider is important to guarantee correct payroll ac­count­ing. The following table sum­mar­ises the measures for min­im­ising risks in external and internal payroll ac­count­ing:

Please note the legal dis­claim­er relating to this article.