When it comes to receiving pay for work in the UK, the fundamental mechanism is the UK payroll system, which for many companies is managed through payroll software. This is the method through which businesses pay their employees, typically done in 12 regular instalments throughout the year or, in other words, once a month.
In order to navigate this process effectively, both employers and employees must first come to grips with the UK payroll system.
Through this system, wages make their way to the bank accounts of employees. However, not only does the payroll get wages from A to B, but the system is also designed as a comprehensive tool for documenting financial records of pay details and the corresponding tax obligations allocated to the HMRC.
Companies that offer payroll software in the UK include:
How HMRC and PAYE Work in the UK
At the core of comprehending UK payroll are two key elements: HMRC and PAYE.
PAYE, the common abbreviation for Pay As You Earn, represents a government initiative in the UK managed by HMRC (His Majesty’s Revenue and Customs). This system efficiently oversees the disbursement of wages and the deduction and management of taxes on the UK payroll.
This will all be represented on your payslip, where you can view your monthly NI and income tax contributions as well as your payroll number.
What Is Deducted From a UK Payroll?
When it comes to paying employees their wages, the PAYE system ensures that the correct deduction of tax is made. Namely, Income Tax and National Insurance (NI) contributions.
Income tax is what finances the public services so crucial to the UK, encompassing essential sectors such as the NHS, various infrastructure, and education. On the other hand, National Insurance contributions contribute to benefits and pensions, including state pensions, maternity allowance, and bereavement support.
In addition to NI and income tax, various other deductions may be made from your payroll. This includes items such as student loan repayments, child maintenance, and the option to make charitable donations through the Payroll Giving scheme directly from your wages.
How Is Payroll Tax Calculated in the UK?
The specific amount deducted will depend on how much an employee earns and which subsequent plan they’re on. As a result, the payroll system is designed to allocate only what an employee can afford for NI and income tax contributions.
Worked out using an employee’s NI category number and tax code, how much income tax you pay each year depends on the income exceeding the personal allowance – currently set as £12,570. Anybody who earns under this figure will not be expected to pay tax.
However, for those who do earn above the personal allowance, the percentage of income tax they pay will depend on whether the individual falls into the basic rate, higher rate, or additional rate categories.
On the other hand, your NI contributions will be contingent upon a specific category, denoted by a letter.
It’s important to note that these income tax bands and NI contribution categories may fluctuate with each tax year, which runs from April to April. It is, therefore, crucial to stay updated on the current tax levels on the UK government website.
Companies that offer payroll software in the UK include:
How To Register On The UK Payroll
Payroll isn’t just for businesses that employ others. Employers can also pay themselves a wage through the PAYE system.
As an employee of an organisation, your employer will set you up automatically on the payroll. However, as an employer, if you’d like to be paid on the payroll, you must make sure to register yourself.
While being on the PAYE payroll as an employer is optional, the advantage is that once registered, it manages all your income tax and NI contributions. If you choose not to register with PAYE, you’ll be required to complete a self-assessment tax return annually.
Furthermore, upon registering yourself or your employees on the payroll, if you decide to run the payroll yourself, you’ll need to find appropriate payroll software that will report to the HMRC.
This software not only calculates employee pay and deductions but also determines the amount to be remitted to the HMRC. Additionally, it computes statutory pay, such as sick or maternity pay, maintains employee details, and submits comprehensive payroll information to the HMRC.
