In this article we’ll go over what an employer’s payroll responsibilities are, and some of the most common pitfalls to watch out for.

What is payroll?

In the simplest terms, your payroll is a record of all the people in your business and how they’re compensated for their work. The process of “running” payroll refers to the method by which pay is worked out, documented, and reported.

What are some common mistakes employers might make with payroll?

While running payroll may seem simple enough, it’s easy to get things wrong. There are so many things to keep track of, and you might not even be aware of everything you need to do!

Common issues can include not claiming the Employment Allowance, overlooking non-cash benefits which should be taxed (known as benefits in kind), and pension schemes. We’ll go into more detail below.

Not claiming your Employment Allowance

This is a big one. The Employment Allowance is a type of relief available to some employers which helps reduce the cost of their National Insurance contributions by up to £10,500 each year.

Once you use up the allowance, you’ll start making contributions as an employer again. You don’t even need to be paying more than £10,500 to qualify, either; you can still benefit if your bill for employer’s NI is less than this.

It’s important to note that this only applies to your contributions, not your employees’.

Not paying tax on a benefit in kind

Some employers will provide non-cash perks as part of the ‘package’ they give to employees. Company cars are the most common example of this.

The employee or director who receives the benefit will often need to pay income tax on it, just like they would if they received the equivalent value in the form of a salary instead. They might also need to pay NI on the benefit if it’s cash, or if it’s something they can sell or turn into cash, rather than keep.

Employers are also required to make Employer’s National Insurance Contributions on the value of any benefits in kind they provide.

All this means the benefit must be reported by the employer to HMRC so that it can be included in the calculations for tax and NI. Make sure you report them through payroll, and on time to avoid penalties!

No workplace pension scheme

Another responsibility you have as an employer is to set up a workplace pension scheme for your staff, automatically enrolling anyone who’s eligible. Now this isn’t optional, it’s a legal requirement if:

• You have employees aged between 22 and State Pension age
• They earn more than £10,000 per year
• Your business is in the UK, and your employees each have a contract of employment
• Your employees’ day-to-day duties are in the UK

The way it works is you as the employer deduct a pension contribution from an employee’s wages and then pay the amount into the scheme on their behalf, along with your own contribution. The minimum contribution is 8% of the employee’s pensionable earnings (and at least 3% must be from you as the employer).

Note: these contributions are in addition to National Insurance contributions, rather than instead of.

It’s also part of your obligations as an employer that you give your employees the option to opt out of the workplace pension scheme if they want to, so don’t overlook this!

You’ll need to make sure you have good systems in place to check who should be auto-enrolled, removing anyone who opts out, and setting reminders to repeat the process using the mandatory timeframes. The Pensions Regulator has a checklist of everything you need to do and when.

Hiring someone as a freelancer vs. as an employee

If you’re a business owner and haven’t come across IR35 before, it’s time to get clued up.

IR35 was introduced to minimise the risk of tax avoidance caused by someone working through their own limited company, when they would otherwise be considered employed based on the type or amount of work they’re doing.

In other words, they would simply work for their client as a regular employee if the intermediary didn’t exist.

Failing to comply with the rules can result in financial penalties, so our guide goes into more detail about who is responsible for checking IR35 status, and what to do if you employ someone inside the IR35 rules.

 
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.

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What is PAYE?

PAYE stands for Pay as you Earn, and is the system used by employers to deduct income tax and National Insurance (NI) directly from employees’ and directors’ wages before paying it on to HMRC.

Some people will refer to PAYE taxes, but it’s actually the mechanism for colelcting tax, rather than a tax in its own right to HMRC. The deductions made through PAYE can include things like income tax, National Insurance (NI), Student Loans repayments, and pension contributions.

Do I need to register for PAYE?

Employers should register for PAYE if any of the following apply:

• An employee earns the Secondary Threshold for National Insurance or more. The current threshold for the 2026/27 tax year is £5,000 per year (or £96 per week).
• You provide employees with benefits or taxable expenses (known as benefits in kind)
• An employee has another job or receives a pension
• You need to pay NI

The same rules will apply to absolutely any employer, even if you’re a sole trader with staff or a larger company.

The difference between payroll and PAYE

Payroll is the process of paying employees and workers for the work they have done. It involves recording data about employees so you can calculate their pay correctly, as well as working out what needs to be paid to HMRC and other bodies for things like income tax, NI contributions, and pensions. We go over some common payroll mistakes to avoid in a separate article.

PAYE is the mechanism an employer uses to report this information to HMRC, and to pass on any deductions.

Registering as an employer for PAYE

If you’re getting ready to take on your first employee, you’ll need to register as an employer before before your first payday.

You can register for PAYE online, and can either do it yourself or ask an accountant to manage PAYE registration for you. You’ll need to confirm the number of employees (including yourself), the frequency of PAYE payments to be made, and the date of the first PAYE payment.

Set up payroll

A payroll system uses the employee’s details to calculate how much PAYE will be deducted from their payslip each month. This is where hiring an accountant comes in useful. Payroll calculations can be time consuming, and confusing!

Payslips

You’ll need to provide every employee with a payslip each time you pay them, confirming what their wages are, and how much you’ve deducted.

Pay PAYE

After you have paid employees it will be necessary to pay PAYE to HMRC. This is the amount you deduct from your employees’ wages. Failure to do so will incur hefty fines from HMRC, and all sorts of uncomfortable chats with angry employees. This is an easy transaction that can be completed online.

Make sure you report everything to HMRC on or before each payday, and send any payments to them by the 22nd of the following tax month in which they happened (a tax month is 6th to the 5th each month).

 
Check out our accounting support hub for more help and resources, or to ask a tax question.

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What is RTI?

RTI was introduced to simplify the operation of PAYE filing. Rather than employers having to submit an end of year form to HMRC and forms that indicate an employee has either started or left employment, information is submitted to HMRC every time an employee is due to be paid.

What will penalties be charged for?

A Full Payment Submission (FPS) has to be sent to HMRC either before or when an employee is paid, stating the amount paid along with tax and other deductions. At the year end, rather than having to submit a P35 end of year form and P14s to HMRC, the employer submits an FPS. If this is not submitted, HMRC will charge a penalty.

If PAYE is paid late, a penalty will be charged. If a FPS or an Employer Payment Summary is submitted late, a charge will follow too, along with a penalty for any in-year forms that are either filed late or not at all.

If any mistakes are made when completing and submitting the returns, a penalty will be charged too.

When will penalties come into force?

HMRC has introduced a new timetable of penalties and when they will be issued, taking into consideration the difficulties that may be experienced by smaller companies when trying to incorporate the new Real Time Information system. If you file in-year reports late and you are an employer with 50 or more employees, penalties can into effect as of 6th October, 2014. Employers with fewer than this won’t be charged penalties until 5th March, 2015. Micro employers with fewer than 10 employees will experience relaxed reporting rules until April 2016, although the guidance is still being looked at.

Missing the final submission of FPS will result in a penalty being charged at £100 for every 50 employees. Any errors or mistakes made on returns will be charged a penalty in 2014-15. If PAYE is not paid on time, a penalty will be charged, with in-year penalties being automatically charged from April 2015.

RTI penalties are complex and you may want to seek professional advice.

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