Asmita Associates

Payroll - legal obligations and your choices

This Guide cover the legal obligations you must meet when it comes to your payroll as well as the options available for managing your payroll.

Managing your payroll isn't just about paying your employees. There are various legal obligations you must meet when it comes to your payroll as well as numerous options for actually managing your payroll.

Your obligations include:

The payslip

Every time you pay an employee, you are legally obliged to provide a payslip containing the following details:

Total gross earnings - All the employee has earned in the relevant period including regular pay, overtime, bonuses, commission, fees, statutory sick pay, statutory maternity pay and so on.
Total deductions - All that you've deducted from their pay including tax, National Insurance, pension contributions, student loan repayments etc.
Net pay - This is the employee's take-home pay once all deductions have been subtracted from gross pay

Tax and National Insurance

As you administer tax and National Insurance Contributions (NIC) collection on behalf of the Inland Revenue, you must also:

Notify your Inland Revenue accounts office when an employee starts or leaves, usually via a P45 form
Work out and deduct PAYE Schedule E income tax and National Insurance
Record details of these deductions each pay day on form P11
Pay all deducted monies to the Inland Revenue each month or quarter within 14 days of the end of the tax month
Submit full deduction details at the end of the tax year (5 April) on forms P14 and P35
Provide each employee with a record of their pay and deductions at the end of the tax year on form P60

Where relevant you may also be required to:

Deduct student loan and stakeholder pension contributions each pay day
Make payments of tax credits, statutory sick pay and statutory maternity pay. If necessary you can apply for funding from your accounts office to make these payments.

Compulsory e-filing

All of this may seem daunting, especially as since 2002 there have been a number of changes to the PAYE system of tax collection and now, every employer is required to use electronic filing for their end of year returns: both the P14 end of year summary for each employee and the annual P35 declaration.

Employers with 250 or more employees are required to do this by May 2005; those with 50 or more by May 2006 and all businesses by 2010. Failure to file electronically could result in penalties of up to � 3,000. However there are tax-free cash awards available for employers with less than 50 employees who file online early. For more information Click here>>.

Electronic filing options

A number of financial management applications enable you to file online. In addition the Inland Revenue offers its own software so you can e-file online.

Paper manual system

Time consuming and often complicated this options involves manually filling in forms supplied by the Inland Revenue in conjunction with a businesses tax and NI tables. The paper manual system may be inexpensive but if you are not careful then there is vast room for error.

PC based software products

Also a relatively cheap option thee most basic of these consists of a calculator like programme which is used in conjunction with a paper manual system to calculate tax and NI contributions.

PC based payroll systems

This too is a computerised system but more advanced than a software programme as it usually features technical customer support. Many of these systems are accredited by the Inland Revenue and are purchased on a subscription basis by the user. This Inland Revenue accredited 'in-house' payroll solution provides the tools to minimise tax hassles and make managing payroll easy.

An accountant or bookkeeper

Many small businesses use their accountant or bookkeeper to partly or fully manage their payroll, this takes the hassle out of payroll management but can limit the amount of value added services your accountant or bookkeeper could offer you.

Outsourced payroll service

This payroll system is provided by a third party who will run a businesses payroll remotely and will manage the system for the user. This is usually a subscription based service which can be accessed by a user via internet or telephone. This service is managed by professionals who will constantly be updating there service to ensure it is up to date on all the latest legislation.

This is a minimum rather than a comprehensive list of your requirements, if you are a new employer you will receive a full starter pack containing all the forms and information you need when you register with the tax office, if you are not a new employer then your local tax office will be able to help you with any queries you have.

Payroll - legal obligations and your choices

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