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A Guide to Operating Payroll

A Guide to Operating Payroll

04/12/2020

As an employer operating PAYE as part of your payroll, you need to complete certain tasks during each tax month.

Read on for our comprehensive guide to operating payroll, including different types of pay, reporting to HMRC and the consequences of late payments.

On or Before Your Employees’ Payday

Every time you pay your employees, use your payroll software to:

Record their pay - include their salary or wages and any other pay.
Calculate deductions from their pay, like tax and National Insurance.
Calculate the employer’s National Insurance contribution that you’ll need to pay on their earnings above £183 a week.
Produce payslips for each employee (you can use different software if yours does not have this feature).
Report their pay and deductions to HMRC in a Full Payment Submission (FPS).

If you pay an employee less than £120 a week, you usually only need to record and report their pay (unless they have another job or receive a pension).

In the Next Tax Month (Starting on the 6th)

You can view what you owe from your FPS online from the 12th.

Claim any reduction on what you’ll owe HMRC (for example statutory pay) by sending an Employer Payment Summary (EPS) by the 19th.
View the balance of what you owe in your HMRC online account, within 2 days (or by the 14th if you sent the EPS before the 11th).
Pay HMRC by the 22nd (or the 19th if paying by post) - you may have to pay a penalty if you do not.

If you usually pay less than £1,500 per month, you may be able to pay quarterly instead of monthly. Contact the payment helpline to find out.

Late Reporting

HMRC will send you a late filing notice if you’ve paid any employees and do not send an FPS or send one late. They can also charge you a penalty unless you have a valid reason for reporting late.

Late, missing or incorrect payroll reports can also affect your employees’ income-related benefits, such as Universal Credit.

HMRC will close your PAYE scheme if you’re a new employer and you do not send a report to or pay HMRC in 120 days.

Employees' Pay

Record your employees’ salary or wages in your payroll software. Include everyone you pay, even if they get less than £120 a week.

Recording Other Types of Pay

Statutory Pay

You may have to pay your employee:

Statutory Sick Pay (SSP)
statutory pay for parents (maternity, paternity, adoption, bereavement or shared parental pay)

You must record these in your software - they’re taxed like normal pay.

You can reclaim statutory pay for parents.

Expenses & Benefits

Expenses or benefits like uniforms or company cars are reported separately at the end of the tax year. Check the rules to find out what counts as expenses and benefits, and what you should record in your software as normal pay.

Tips & Other Pay

Treat tips to your staff as normal pay if they’re paid into your till - this includes tips added to your customers’ card or cheque payments. The rules are different if tips are given straight to your employees by customers or paid into a tronc.

Other payments you may give your employee that you should record as normal pay include:

bonuses
commission
holiday pay (unless you pay it in advance or use a holiday pay scheme)
payments for the time your employee has spent travelling
passenger payments, except the first 5 pence per mile
medical suspension payments, given to an employee you’ve suspended for health reasons
maternity suspension payments, given to an employee you’ve suspended for her, or her baby’s, health
guarantee payments paid to an employee for a day they do not work (and not paid holiday)
officeholders’ payments (honoraria), given to employees for providing a service, for example being your company’s sports-club secretary
payments that can be converted into cash, for example, cheques, Savings Certificates or Premium Bonds
inducement payments (‘golden hello’ payments)
cash prizes for competitions you run

The rules are different for non-cash payments like shares or commodities, cash-in-hand or guarantee payments and employee incentive awards.

Deductions

Your payroll software will calculate how much tax and National Insurance to deduct from your employees’ pay. These deductions are worked out using each employee’s tax code and National Insurance category letter.

You may also need to deduct student loan repayments, pension contributions, Payroll Giving donations and child maintenance payments.

Student Loan Repayments

Use your payroll software to record if your employee needs to make student loan repayments - both in your software and on payslips.

You’ll need to calculate and deduct how much they need to repay based on which plan they’re on. They repay:

9% of their income above £19,390 a year for Plan 1
9% of their income above £26,575 a year for Plan 2
6% of their income above £21,000 a year for Postgraduate loans

Pensions

Make pension deductions after you take off National Insurance. You normally make pension deductions before you take off tax - check with your workplace pension provider.

You’ll also need to pay any employer contributions into your employee’s pension.

A new law means all employers will have to provide and pay into a workplace pension scheme for their employees - this is called ‘automatic enrolment’.

Payroll Giving

Your employees can donate to charity directly from their pay before tax is deducted using Payroll Giving.

Register with a Payroll Giving agency to set up a scheme. They’ll let you know how to make deductions.

As well as the usual payroll records, you must also keep the agency contract, employee authorisation forms and details of payments to the agency.

Child Maintenance

You may need to deduct child maintenance directly from a paying parent’s earnings or pension.

You must give your employees and ‘workers’ a payslip on or before their payday.

Producing Payslips

You may be able to produce payslips using your payroll software if it has this feature. You can use different software if it does not.

You can either print payslips to give to your employees, or you can send them electronically.

Employees have certain rights relating to payslips and what they must include.

What to Include

Payslips must show:

pay before any deductions (‘gross’ wages)
deductions like tax and National Insurance
pay after deductions (‘net’ wages)
the number of hours worked, if the pay varies depending on time worked

Payslips can also include information like your employee’s National Insurance number and tax code, their rate of pay, and the total amount of pay and deductions so far in the tax year.

Reporting to HMRC: FPS

Use your payroll software to send a Full Payment Submission (FPS) to tell HM Revenue and Customs (HMRC) about payments to your employees and what deductions you’ve made.

Include everyone you pay, even if they get less than £120 a week.

When to Send Your FPS

Send the FPS on or before your employees’ payday, even if you pay HMRC quarterly instead of monthly.

You must enter the usual date that you pay your employees, even if you pay them earlier or later. For example, if you pay your employees early because your usual payday falls on a Bank Holiday, you should still enter your regular payday.

Early Reporting

You can send an FPS before your regular payday, for example, if your payroll staff are going on holiday.

Do not report too early - you’ll need to send a corrected FPS to update HMRC if information changes, for example, an employee leaves or changes tax code.

You cannot send reports for the new tax year before March.

Completing and sending an FPS

You’ll need to enter your PAYE reference and Accounts Office reference in your software. HMRC will have sent this to you after you registered as an employer.

To complete and send the FPS, follow your payroll software’s instructions.

HMRC has guidance on what to put in each field on an FPS, including:

employer information
employee information - only include employees you’ve paid
pay and deductions
National Insurance information

You can split your FPS into batches if it’s easier for you, for example, one for employees and one for directors.

There are special rules for calculating deductions if your employee has more than one job with you.

After You’ve Sent Your FPS

In the next tax month (which starts on the 6th), you can:

view your FPS and how much tax and National Insurance you owe in your HMRC online account from the 12th
claim any reduction on what you’ll owe HMRC (for example statutory pay) by sending an Employer Payment Summary (EPS) by the 19th
pay HMRC the balance by the 22nd (or the 19th if paying by post)

If you need to make an extra payment to your employee, send an extra FPS before your next regular report (if your software has this feature).

If you made a mistake in your FPS you should correct any errors as soon as you find them.

Reporting Extra Information

You need to report more information on an FPS if:

it includes a new employee
an employee leaves
you start paying someone a workplace pension
it’s the last report of the tax year

You may also need to report extra information about certain employee changes, for example, they take a leave of absence or become a director.

There are special rules if you’re only reporting National Insurance, for example, you’re an overseas employer that does not need to pay UK tax.

Reporting to HMRC: EPS

Use your payroll software to send an Employer Payment Summary (EPS) as well as a Full Payment Submission (FPS) if you:

reclaim statutory maternity, paternity, adoption, parental bereavement or shared parental payments - even if you got an advance payment from HM Revenue and Customs (HMRC) to cover them
claim the Employment Allowance - do this once each tax year
can reclaim Construction Industry Scheme (CIS) deductions as a limited company
claim National Insurance contributions holiday for previous tax years
pay the Apprenticeship Levy if you, or employers you’re connected to, have an annual pay bill of more than £3 million
Send an EPS instead of an FPS if you’ve not paid any employees in a tax month.

EPS Deadlines

Send an EPS by the 19th of the following tax month for HMRC to apply any reduction (for example statutory pay) on what you’ll owe from your FPS.

The tax month starts on the 6th.

Sending an EPS

To complete and send the EPS, follow your payroll software’s instructions. HMRC has guidance on what to put in each field on an EPS.

Use HMRC’s Basic PAYE Tools if your software cannot send EPS reports.

After You’ve Sent Your EPS

Once you’ve sent your EPS, you can:

view what you’ve claimed and the balance of what you owe on your HMRC online account within 2 days (or by the 14th if you sent the EPS before the 11th)
pay HMRC by the 22nd (or the 19th if paying by post).

If you made a mistake in your EPS you should correct any errors as soon as you find them.

If you do not pay any employees in a tax month do not send an FPS. Send an EPS by the 19th after the tax month you did not pay any employees. The tax month starts on the 6th.

HMRC has guidance on what to put in your EPS if you’ve not paid anyone.

If you do not send an EPS, HMRC may:

send you a notice through PAYE Online
estimate how much you should pay
give you a penalty

You can tell HMRC up to a year in advance that you’ll not pay any employees. To do this, enter dates in the ‘Period of inactivity’ fields in your EPS.

Paying HMRC

Every month you have to pay HM Revenue and Customs (HMRC):

the tax and National Insurance (and any other deductions) you owe as reported on your Full Payment Submission (FPS) in the previous tax month
minus the reductions on any Employer Payment Summary (EPS) you sent before the 19th in the current tax month

Pay what you owe by the 22nd of the month (or the 19th if paying by post) - you may have to pay a penalty if you do not.

If you usually pay less than £1,500 per month, you may be able to pay quarterly instead of monthly. Contact the payment helpline to find out.

Viewing What You Owe

View your HMRC online account to see the reports you’ve sent and to find out what you owe.

There are things you can check if your PAYE bill is not what you expected.

Interest and Penalties

HMRC will usually tell you if they think you’ve paid late - either in a letter or a notice through PAYE Online. You’ll be charged interest daily at the standard rate.

You may be charged a penalty if you do not pay on time or in full.

Sending an FPS After Payday

If you send a late Full Payment Submission (FPS) without a valid reason, you may get:

an online penalty warning message for the first late FPS you send each month
a penalty for reporting late

When You Can Send a Late FPS Report

In certain situations, you can send a Full Payment Submission (FPS) after you pay your employee.

Situation	When to report
Your employee does not give you a P45 and is either paid less than £120 a week or has worked with you for less than a week	Within 7 days of paying your employee
Your employees’ payday is on a non-banking day, for example, weekend or bank holiday	On the next banking day - but enter the regular payment date in the ‘payment date’ field and select ‘Late reporting reason’ code G
You make an ad hoc payment outside of your regular payroll, for example, you’re told after you’ve sent your FPS about a new starter or a missed overtime payment. (Payments made regularly outside your normal payroll run are not ad hoc)	In your next regular FPS or an additional FPS
You pay your employee an expense or benefit where you must pay National Insurance, but not Income Tax, through payroll. This depends on the benefit.	Within 14 days of the end of the tax month
You cannot calculate or report your employee’s pay in advance because it’s based on their work on the day, for example, harvest workers paid based on how much they pick	Within 7 days of paying your employee
You make certain non-cash payments to your employee	As soon as possible within 14 days of the end of the tax month, or when you deduct tax and National Insurance (if earlier). For complex situations (for example when exercising share options) contact HMRC
You’ve not received your employer PAYE reference yet	As soon as possible after you receive your employer PAYE reference - select ‘Late reporting reason’ code G

Put the reason for reporting after payday on your FPS for each late submission. If you do not, or if HMRC disagrees with the reason or you do not send an FPS, they may send you an online penalty warning message and a penalty.

Viewing Late FPS Reports in Your HMRC Online Account

If you send an FPS in the same tax month as you paid your employees, you can view the report in your HMRC online account from the 12th of the next tax month.

This is different if you send an FPS in the tax month after payday.

Late FPS sent (in tax month after payday)	HMRC online account updated
Between 6th and 11th	By the 14th
Between 12th and 19th	Within 2 days
On or after the 20th - and you did not send an FPS the previous tax month	Within 2 days
On or after the 20th - and you sent an FPS the previous tax month	By the 12th of the next tax month

Reporting Employee Changes

You need to report more information on a Full Payment Submission (FPS) if:

it includes a new employee
an employee leaves
you start paying someone a workplace pension
it’s the last report of the tax year
an employee changes their address

You may also need to tell HM Revenue and Customs (HMRC) if an employee:

becomes a director
reaches State Pension age
goes to work abroad
goes on jury service
dies
joins or leaves a contracted-out company pension
turns 16
is called up as a reservist
changes gender

Employee Takes a Leave of Absence

Once your employee has started their leave of absence, put ‘Yes’ in the ‘Irregular payment pattern indicator’ in all FPS reports you send to HMRC until the employee returns.

Changing Paydays

You can move your payday to a different day or change how often you pay your employees.

Moving your Payday

If the new payday is in the same tax month or week, treat the first new payment as an extra payment for that period.

You do not need to do anything special when recording pay if the new payday is in a different tax month or week.

HM Revenue and Customs (HMRC) has guidance on how to calculate National Insurance for your employees after changing paydays.

Changing How Often You Pay Your Employees

You must contact the employer helpline if you pay employees less often so HMRC do not send you a non-filing notice through PAYE Online.

Most payroll software can automatically manage any changes to how often you pay your employees (for example from monthly to weekly) and work out deductions correctly.

Using Basic PAYE Tools

There are some limitations on when you can make these changes if you use HM Revenue and Customs’ (HMRC) Basic PAYE Tools.

Paying Your Employees More Often

If you’ve not already paid your employees, use the new earnings period (in the ‘Pay frequency’ field) in your Full Payment Submission (FPS) when you next pay them.

If you’ve paid your employees, you can use the new earnings period from the next tax month.

Paying Your Employees Less Often

If a payment from your old pay period also takes place in your new pay period, calculate and deduct National Insurance on both. Do not deduct more National Insurance than would’ve been due on the combined total of both payments.

If an employee also joins your contracted-out pension scheme during this period, deduct National Insurance at the contracted-out rate on the total of both payments.

Deduct tax based on the new earnings period the next time you pay your employees.

Annual Payroll Scheme for PAYE

If you pay your employees only once a year, and all in the same tax month, you can register with HMRC as an ‘annual scheme’.

This means you send reports and make payments to HMRC annually. If you pay your employees on different days in the same tax month, you need to send an FPS on or before each payday. You do not need to send an Employer Payment Summary (EPS) for the months when you do not pay your employees.

To register, contact the employer helpline and tell them which month you pay your employees. You’ll need your 13-character Accounts Office reference number - this is on the letter HMRC sent you when you registered as an employer.

Changing When You Pay Your Employees

If you change the month you pay your employees, send an FPS in the month that you want the new annual payment month to move to. If it’s later than the month you usually pay your employees, you’ll need to send an EPS for that month to tell HMRC you’re not paying anyone.

Example

If you usually pay your employees in August but want to change to September, send an EPS in August and an FPS in September.

If you send more than one FPS in a year, HMRC will assume you no longer wish to operate as an annual scheme and send you a letter to confirm.

Related Guides

How to Set Up a Limited Company

A Guide to Expenses for a Limited Company

And there you have it, our comprehensive guide on how to operate payroll.

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