What is Payroll?

Discover the ins and outs of payroll with our employer’s essential guide to processing wages

First published on Thursday, May 30, 2024

Last updated on Thursday, Jun 20, 2024

What is payroll? It’s a critical question for any employer or business owner. Essentially, payroll is calculating and distributing your employees’ earnings, balanced with tax withholding, benefits, and compliance with government regulations.

In this article, we’ll navigate you through the ins and outs of payroll, helping you understand how to process it accurately and keep your business in line with UK legal standards, all while maintaining employee satisfaction.

Decoding payroll: What exactly is payroll?

In the world of business, you’ve likely heard the term ‘payroll’. But what is it exactly?

At its core, payroll is the process of paying employees for their hard work and dedication. It’s a detailed record that reflects an employee's earnings over time.

Yet, payroll is more than a simple act of payment. It's a complex process that makes sure employees get paid while following all the legal rules.

It involves:

  • Deducting taxes

  • Contributing to National Insurance

  • Reporting to HM Revenue and Customs (HMRC)

  • Making sure that employees are paid on time

And as a business owner, you carry the weighty legal responsibility of accurate payroll calculations. Payroll is also essential for keeping employees happy and satisfied, and it's a crucial part of a business's success.

Two colleagues working at a desk in an office, focused on payroll processing

The anatomy of payroll: Breaking down the basics

When you dive into the anatomy of payroll, you’ll quickly realise that payroll is a dynamic process.

The heart of payroll lies in the precise records that document employee information, salary details, and benefit contributions.

But it’s not just about keeping records; you must perform complex calculations, considering varying pay rates and additional payments to generate accurate payslips for your workforce.

Simply speaking, the basics of payroll can be broken down into three main components, they are:

Employee information

Successful payroll requires knowledge of your staff. Detailed employee records are the compass that guides effective payroll management.

This means gathering:

  • Names

  • Addresses

  • National insurance numbers

  • Salary details

All of these are essential for running payroll.

Calculating Gross and Net Pay

The journey to an employee’s net pay starts with understanding the employee’s gross pay—the full amount earned in a pay period before any deductions make their mark.

For hourly employee, gross pay is the product of their hourly wage, multiplied by the hours they’ve worked, including overtime. From this, you must subtract the necessary contributions—taxes and National Insurance, which will vary per employee.

An employee’s net pay is what remains after all those deductions have been taken, this is the true amount an employee takes home.

Remember, a clear distinction between gross and net pay on payslips is not just helpful, it’s the law.

To learn more about calculating payroll, you can read our article on how to calculate payroll.

Handling Taxes and Deductions

Let’s not forget about taxes. You are responsible for calculating income tax and National Insurance contributions, ensuring that your employees and the government both receive their rightful shares.

Taxes and deductions are like hidden currents beneath the surface, requiring careful navigation to avoid obstacles.

You must follow HMRC’s rules, including using tax codes, to calculate and withhold the correct amount of income tax and National Insurance contributions, ensuring compliance with payroll legislation.

But it’s not just mandatory deductions that need attention. Voluntary deductions such as pension commitments and student loan repayments vary with each employee’s circumstances.

Employers also contribute to pension schemes, accounting for at least 3% towards the total minimum contribution—a vital part of the UK’s payroll legislation.

Even holiday pay has its place in the payroll ledger, taxable as earnings unless received early.

Navigating payroll requires up-to-date tools and a keen eye on payroll legislation to stay compliant. The cost of getting it wrong can lead to penalties, daunting investigations, or worse, prosecution.

A woman in glasses and an apron sits at a table with papers and a laptop, working on payroll processing

Payroll in action

When processing payroll, it's important to strategically calculate wages for hourly employees based on their hours worked and hourly rate, including overtime and bonuses.

You should also decide on pay periods and pay dates, which should align with HMRC's tax month (from the 6th of one month to the 5th of the next) for smooth processing.

Once you have chosen your payroll schedule, you need to report the amounts and deductions to HMRC and submit them on or before your chosen pay date. Then, all PAYE payments must be made by the 22nd of the following month to stay compliant and avoid penalties.

Tracking work hours and overtime

Keeping track of employees' work hours, sick leave, and overtime is crucial for ensuring accurate payment. This not only guarantees the correct amount is paid but also provides transparency and trust between you and your employees.

Digital time-tracking systems and absence management software are the perfect tools to keep track of this information.

Not recording this information accurately can result in improper payments and corrections that may affect multiple tax years—a scenario that could negatively affect your moral and financial stability.

Disbursing employees pay

Once the payroll calculations have been checked and double-checked, it’s time to distribute the pay.

Employees typically receive their earnings through direct deposit into their bank accounts.

On top of paying your employees, you are required by law to provide them with payslips that reflect the wages and deductions deducted from their salaries.

Payslips must include specific information such as:

  • The employee's name

  • Period of pay

  • Hours worked

  • Deductions made

  • The gross and net amount

It’s important to make sure that your payslips are accurate and comply with HMRC regulations.

Payroll reporting and compliance

As with any journey, there are rules of navigation that must be followed.

For payroll, this means ensuring the correct amounts of tax and National Insurance are deducted and paid to HMRC on time.

Registering as an employer with HMRC is the first step before bringing on employees, a process that secures your employer's PAYE reference number. PAYE is a system to deduct tax and National Insurance contributions from your employees' wages.

To register for PAYE, you must complete a PAYE registration form and provide the necessary information such as the company's details, the employees' details, and the payment details.

After registering for PAYE, you must set up a payroll scheme, which involves establishing payroll systems and processes to accurately compute and record employees' salaries and deductions.

As mentioned previously you are responsible for calculating and reporting payroll information to HMRC.

This involves determining employees' gross wages, deducting appropriate tax and national insurance contributions, and calculating the net wages payable to employees.

It’s important to note that you must calculate the deductions based on the appropriate tax bands and national insurance thresholds, as set by HMRC.

Your next step will be to submit the calculated payroll information to HRMC regularly usually monthly. You must file the payroll information electronically using HMRC's online portal or submit it via other approved methods.

But that’s not all, you may need to submit additional reports, like the Employer Payment Summary (EPS), to claim reductions on amounts owed, such as for statutory pay.

Once, all reporting is complete you must maintain an accurate and up-to-date record of all employees' payroll information. These records should be securely stored and made available for inspection by HMRC in case of audits or investigations.

A young woman happily typing on her laptop, focused on payroll work

How BrightHR can help you with payroll

Now, we know that’s a lot of information and work to do for payroll—let alone the consequences of getting wrong.  But there’s no need to worry if you have a smart online payroll system or even a fully managed payroll service.

That’s where BrightHR Payroll comes in.

Our Payroll Software is designed to simplify the process, making it easy for you to handle payroll tasks with confidence and efficiency.

While our Managed Payroll Service does it for you, ensuring everything is calculated correctly.  From tax codes to National Insurance contributions and statutory pay—we handle all of it. Plus, we’ll file everything with HMRC on your behalf.

So why juggle all that payroll work, when you can have the experts handle it for you? Learn more about BrightHR Payroll Service.

Janine Lennon

Head of Payroll Services

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