As an employer, you have a basic responsibility to make sure your staff are paid the right amount – and on time. This is true whether you’re taking on an employee for the first time or simply switching from one payroll system to another.
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.
