How to pay staff
Dec 08 2009
Take the pain out of payroll with our easy-to-use guide on PAYE and National Insurance.
If you are starting up a business, you will need to pay employees' income tax, National Insurance Contributions and student loans by setting up a Pay As You Earn (PAYE) system.
The first thing you will need to do is register as an employer with HMRC. Once you have completed this process, you will need your employee’s P45 (from the previous employer) in order to add them to your books. If they don’t have one, then you will need to complete a P46 to get a tax code from HMRC.
Keep a record of all salary deductions made, including National Insurance contributions (NICs), tax and student loan deductions. HM Revenue & Customs (HMRC) provides a P11 for you to record these details. PAYE and NICs will vary, but you can check the HMRC’s website for the current tax tables.
There are software package that will help you with this. For example, the Inland Revenue provides a CD and there are number of other software providers on the market.
Every month tax and national insurance should get deducted from salaries (you will receive a booklet and form to fill out along with a cheque to send to the Inland Revenue). If you are paying below a certain threshold, you can pay on a three-monthly basis, although from a cash flow point of view, it can be advantageous to pay monthly.
Pay slips for employees should include the gross pay for the week or the month, cumulative gross pay for the tax year to date, tax NI and any student loans deducted for the period and cumulatively as well as net pay.
Clive Lewis, head of SME issues at the Institute of Chartered Accountants in England & Wales, advises: ‘Once you start getting into holiday or sick pay things can get quite complicated, as there is a legal obligation to paying staff. I would recommend speaking to a professional before that happens,’ he says.
Lewis adds that the proof of the payroll system will come at the end of the tax year (5th April) when you fill out an employer’s tax return. ‘This is the acid test of how thorough your records are. So it is best to ensure that they are kept in good order throughout the year,’ he says.
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