Guide to Setting Up Payroll Through HMRC

Every month, employees expect to be paid a regular salary instalment. But this doesn’t just happen by magic. Employees are paid correctly and fairly through the wonder that is the UK payroll system.

This is typically done in 12 regular instalments throughout the year or, in other words, once a month. To guarantee the timely disbursement of salaries (and avoid any disgruntled employees left empty-handed) two pivotal components come into play in the UK payroll system: HMRC and PAYE.

To navigate the HMRC and PAYE payroll process effectively, both employers and employees must get to grips with the UK payroll system to ensure a smooth payroll cycle.

Companies that offer payroll software in the UK include:

1. Rippling
2. Pento
3. Deel

PAYE and UK Payroll

Let’s start with the basics: understanding the roles of PAYE and HMRC in the UK payroll system. In the UK, when an employee surpasses a specified threshold – currently set at £12,570 – they are required to make payments for Income Tax and National Insurance (NI) contributions.

His Majesty’s Revenue and Customs, also known as HMRC, is responsible for collecting these tax contributions, and this is done through its system known as PAYE, or ‘Pay-As-You-Earn’. So, if you’re contemplating how to establish payroll through HMRC to facilitate payroll and ensure the collection of tax contributions, let’s delve into the details.

How Do Run Payroll Through HMRC?

Every PAYE payroll must remit payments to the HMRC to ensure accurate tax calculations and deductions for all employees. This process can be managed either through a payroll provider or you can opt to run payroll yourself.

If you choose to utilise a payroll provider, while you will still be responsible for collecting and keeping your records and those of your employees, your payroll provider will run your PAYE payroll to the HMRC.

Alternatively, there is the option to run payroll yourself. So, how do you run the PAYE payroll?

How Do I Run Payroll?

If you’re an employer, you have the option to manage this process independently. However, as mentioned, even if you choose self-operation, it is imperative to first register with the HMRC to ensure compliance with UK tax regulations for both you and your employees.

To establish PAYE payroll for yourself as an employer and your fellow employees, you must follow these steps:

1. Register as an employer with HMRC. You will then get a login for PAYE Online.
2. Choose payroll software. This enables the recording of employee details and the calculation of pay and deductions. This software will also facilitate the reporting of information to HMRC.
3. Regardless of whether you use a payroll provider or handle it yourself, you remain responsible for collecting and maintaining records.
4. Inform the HMRC about all of your employees.
5. Report your pay and any deductions to HMRC on or before the first payday.
6. Settle the tax and NI contributions you owe to HMRC.

Adhering to these steps ensures a smooth and compliant PAYE payroll operation to the HMRC.

Can I Run Payroll As A Sole Trader?

If you’re a sole trader or self-employed, payroll works a little differently.

Self-employed workers are not paid through PAYE. However, they are still required to pay the same tax and NI contributions and thus they must inform the HMRC about their employment status.

It’s worth noting that even if someone is considered an employee by a company, HMRC might still classify them as self-employed based on their contract. If there’s uncertainty about employment status, it would be worthwhile contacting the HMRC for clarification.

As a self-employed person, you will have different rights and responsibilities from a typical employee. This typically includes aspects such as not receiving holiday or sick pay, invoicing for their services, working without direct supervision, and notably, handling their own NI and tax contributions.

Because self-employed people aren’t put on PAYE, they are responsible for paying their own NI and tax contributions. This will be done in a self-assessment tax return that will be submitted to the HMRC.

Maintaining accurate records of earnings is crucial for completing the tax return correctly. Once submitted, HMRC assesses the reported information to determine the owed amount.

Self-assessment tax returns must reach HMRC by 31 January, covering the previous tax year from April to April.