A‑Z Payroll Glossary — Sage Advice UK

Payroll: Understanding the Basics

First, what is a payroll?

Payroll is the list of employees and workers that a company must pay and the amount they receive. This is also the total amount of salaries and wages that a company pays to its employees. Managing it using payroll software can make life a lot easier.

The payroll function includes:

• Calcu­lating salary for everyone on the payroll
• Deduction of taxes and legal oblig­a­tions as required
• Scheduled salary payment via check or direct deposit
• Manage records for each employee, including current year salary infor­mation
• Make income tax payments and submit returns on time

AZ Payroll Abbreviations and Concepts

Minimum wage rate for apprentices

Whilst the majority of workers are entitled to either the national minimum wage or the national living wage, appren­tices under the age of 19 or aged 19 and over who are in their first year of training can receive a minimum apprentice wage.

This rate is signif­i­cantly lower than the national minimum wage, but like the minimum wage and the national wage, it typically increases every year.

Details can be found on the government website.

Automatic login

Every employer is required by law to help their employees save for retirement by automat­i­cally enrolling eligible employees in and contributing to a company pension plan.

This is separate from the state pension and is paid by social security.

To be eligible, employees must:

• You must be between 22 and the statutory retirement age
• Earn over £10,000 per year
• Work in the UK

There are also workers who may not be eligible for automatic enrollment, but for whom you may still be required to make minimum pension contri­bu­tions if they choose to join the pension system.

Complying with auto-enrolment (also known as auto-enrolment) means that employers must have selected a pension scheme, figured out who needs to partic­ipate (e.g. those new to the workforce) and then commu­ni­cated this to employees individ­ually How automatic enrollment works applies to you. It is crucial that you also declare your compliance to the pension super­visory authority.

Employees

Employee employment law distin­guishes between employees and employees. The difference for employers lies in the rights that must be granted to everyone. Employees are typically identified by using a written employment contract for their employment.

Employees have rights not granted to employees by law, such as: B. Sick pay, severance pay, maternity leave/pay, protection against unfair dismissal, the right to request flexible working hours and more. Both employees and employees are entitled to basic rights, such as the minimum wage.

The difference between an employee and a worker can be subtle, and you should seek an expert opinion when in doubt. Denying an employee their rights because you believe they are an employee can lead to legal challenges and reputa­tional damage to your company.

EPS – Summary of employer payments

The Employer Payment Summary (EPS) is one of the submis­sions you may be required to complete as part of Real Time Infor­mation (RTI). It is required in lieu of a Full Payment Submission (FPS) if no employees were paid in the tax month.

Alter­na­tively, in a few situa­tions you may need to submit both an EPS and an FPS, such as: E.g. when claiming back statutory maternity leave, applying for Employment Allowance or claiming back CIS (Construction Industry Scheme) deduc­tions.(GG4) . There are also some other situa­tions where you may need to use an EPS — see government guidance.

FPS – Full Payment Submission

Every time you pay one or more employees (even if the employee is paid less than £118 per week), the Full Payment Submission (FPS) must be sent to HMRC via Real Time Infor­mation (RTI).

This lists payments and deduc­tions. It also contains further infor­mation about the salaries of your employees as well as details of new or leaving employees. This allows HMRC to keep up to date with your payroll and your employees’ taxes and national insurance. It is also used by DWP for people who are eligible for Universal Credit. It is therefore important to ensure that payroll is processed correctly and on time, otherwise it may impact the employee’s UC entitlement.

FPS can only be sent through payroll software. It should be sent on or before your employees’ payday. You can send the FPS earlier than usual if there are special circum­stances, such as: B. if the personnel in payroll are on vacation.

There are also situa­tions where you can send an FPS late, but these are very specific to certain, less typical problems.

If you make a mistake in your FPS or submit it early and then find that new data needs to be submitted to HMRC, you can usually correct this in your next FPS, although you may need to take other remedial action.

GDPR – General Data Protection Regulation

The General Data Protection Regulation (GDPR) is a data protection law that came into force in the European Union (EU) on May 25, 2018 and has direct effect in all EU member states. The provi­sions of the GDPR were incor­po­rated into UK law as part of the Data Protection Act 2018 and will therefore continue to apply after the UK leaves the EU (and after the withdrawal period has expired).

The focus of the GDPR is on protecting personal data, i.e. data about individuals. In fact, GDPR is one of the biggest disrup­tions ever in how we handle personal data — poten­tially affecting not just businesses, but every individual, company, public authority, agency or other body in the EU United Kingdom, which processes personal data of individuals residing in the EU and the United Kingdom. This includes suppliers and other third parties that a company may use to process personal data.

Because HR and payroll processes large amounts of personal data, you need to ensure your processes are GDPR compliant. You should consider consol­i­dating all of your HR and payroll data into as few places as possible.

You should also consider intro­ducing other relevant rules and standards, such as: B. ISO27001, which can help you meet some of the security oblig­a­tions under the GDPR. Your GDPR-compliant processes must take into account all data sources, which can be challenging when managing human resources.

Find out how to securely store, for example, sick notes or emails and text messages from employees requesting time off. The same applies to the secure handling and storage of timesheets.

IR35

If a worker supplies their services through an inter­me­diary, such as a personal services company, they will still have to pay their fair share of tax and National Insurance Contri­bu­tions (NICs).

To address this, the government has enacted a law on work rules outside of payroll. This is often referred to as IR35. Tradi­tionally it was up to workers to decide their status, but the rules have changed to force public sector employers to decide their status.

From April 2021, all medium and large private sector employers will also be respon­sible for deciding whether the IR35 rules apply — and poten­tially adding the individual to the payroll, including deducting tax and NICs at source. Check out our guide to IR35.

social security

National insurance contri­bu­tions (NICs) help fund a range of government benefits, such as the NHS, unemployment benefits and the state pension. The majority of employees pay NICs, which are deducted from their salary by the employer in a similar way to income tax.

Employers are also required to make separate NI contri­bu­tions for each employee. Both are calcu­lated as a percentage of the employee’s salary.

The government requires employers to record NICs through payroll under the Pay As You Earn (PAYE) system and the details must be collected through Full Payment Submission (FPS) submis­sions within the Real Time Infor­mation (RTI) system Payroll software is provided.

All workers over the age of 16 must issue NICs if they earn more than £242 a week. There are several classes of social insurance, but most employers only have to deal with classes 1, 1A and 1B (the latter two apply to expenses or benefits provided to employees, such as company cars or health insurance). Classes 2, 3 and 4 relate to self-employment or voluntary contri­bu­tions.

The amount of NICs paid by the employee and the employer for that person depends on the desig­nation of the employee’s social security category. Most workers belong to category A. Category

Each employee’s category letter should be documented on their payslip. HMRC sets the rates and thresholds for each category each tax year. You can view the tariffs and tables for the current year on the government website.

Category letter and employee group

• A: All employees except those in groups B, C, J, H, M and Z in this list
• B: Married women and widows are entitled to reduced social security
• C: Employees over the statutory retirement age
• J: Employees who can defer social security because they are already paying it in another job
• H: Apprentice under 25
• M: Employees under 21 years of age
• v: Employees who have been working in their first job since leaving the Bundeswehr (veterans)
• Z: Employees under 21 who can defer Social Security because they are already paying it in another job.

National Living Wage

The national living wage is effec­tively an extension of the national minimum wage, which applies to workers aged 23 and over. It is above the minimum wage. You must pay those eligible at least the national living wage.

Failure to do so will result in you breaking the law and may result in legal action and reputa­tional damage. Like the minimum wage and apprentice wage, the national living wage typically increases each year, as stated in the govern­ment’s autumn budget — current rates can be found on the government website.

National minimum wage

Workers and employees who are of school leaving age or older must receive at least the national minimum wage. Basically, there are three minimum wage rates based on the person’s age: under 18, 18 to 20 and 21 to 22. The rate typically increases every year and is set by the government in the autumn budget. The current rates can be found on the government website.

Those over the age of 23 should receive the national living wage rate, while a separate rate applies to appren­tices in certain circum­stances. Any contract that provides for less than the National Minimum Wage (or the National Living Wage/Apprenticeship Wage, if applicable) is not legally binding and it is illegal to pay less where there is no contract in place (e.g. if you employ casual workers).

Individuals have the right to demand and receive the minimum wage retroac­tively. If the employer does not pay at least the correct minimum wage rate, the employee or worker has the right to sue in court. Additionally, the types of workers who should receive the national minimum wage include:

• Part-time employees
• casual workers
• Temporary workers
• Homeworkers (i.e. those who are paid based on the number of items they produce)
• Appren­tices (however, there is also a separate apprentice rate for people under 19 or over 19 and in the first year of training)
• Trainees and proba­tionary workers
• Foreign workers

This list also applies to national living wages and appren­ticeship rates.

People who are not entitled to the minimum wage include company managers, volun­teers, people who accompany others at work and various other, less typical categories of workers — see Government guidance for further details.

The minimum wage can impact a number of issues. Payroll managers need to ensure that this is built into any payroll cost forecast and that you keep track of any employees and workers who may be moving to a different pay rate. This may also affect auto-enrollment eligi­bility.

Payroll software can identify employees and workers eligible for minimum wage, including appren­tices, and ensure you always pay them enough. Intuitive solutions detect when someone’s birthday increases them to the next minimum wage rate, so you don’t have to manage this manually. If the employee is paid less than the minimum wage for their age group, you will be asked to change the rate.

PAYE – Pay as you earn

The government requires employers to collect their employees’ taxes and social security contri­bu­tions at source. This system is known as Pay As You Earn (PAYE). The money must be trans­ferred to the government immedi­ately, usually by direct debit via the company’s HMRC online account. The infor­mation must be submitted from the Real Time Infor­mation (RTI) system via the payroll software.

The amount each employee pays is deter­mined in part by their tax code, which is provided by the government. However, the employee should verify that it is correct.

Pay online

PAYE Online is HMRC’s online payroll service. Regis­tration by the employer is required and you must enter your PAYE Online account details into your real-time infor­mation (RTI) payroll software. Although you can log in to PAYE Online and view details and notifi­ca­tions about your payroll, you cannot use PAYE Online to send payroll reports. This requires payroll software.

An exception is the submission of forms P46 (Auto), P11D and P11D(b), although these can also be submitted via payroll software.

In addition to accessing PAYE Online via a web browser, you can also download and use the PAYE Desktop Viewer. This is free software offered by HMRC that allows you to view, search and sort a large number of employee tax codes and notices. Versions are available for computers running Microsoft Windows, Apple macOS and Linux.

End of the wage and salary year

The end of the payroll year is the process by which you submit your final payroll report to HMRC for the current tax year ending April 5th. As part of reporting the final figures, you will need to give your employees a P60 and prepare for the new tax year which starts on April 6th.

4 steps are required:

• Submission of the final payslip for the year: You must send your Final Full Payment Submission (FPS) on or before your last payday of the tax year. You must record this as your final submission for the year. If your software doesn’t allow this, you’ll need to send an Employer Payment Summary (EPS) instead.
• Updating Employee Payroll Records: You must verify that all employees’ tax codes are correct for the new tax year. HMRC will send you a P9T form for employees who require a new tax code and a P9X general changes form for employees whose tax code ends in ‘L’.
• Distrib­uting P60s: You must pay all employees on your payroll who work for you a P60 on the last day of the tax year. Just like payslips, these are now usually sent electron­i­cally and no longer in printed form. The P60 summa­rizes total wages and deduc­tions for that year. Your payroll solution may automat­i­cally create P60 amounts for you. The company must provide the P60 to every eligible employee by May 31.
• Report expenses and benefits: You must report expenses and benefits to HMRC before July 6th unless you are already claiming benefits. Class 1A social security attrib­utable to taxable expenses and benefits is due by July 22nd.

P6

More precisely, it is a notifi­cation of a change in the tax number. HMRC will send you a notifi­cation if an employee’s tax number changes during the tax year.

The tax code change notice is sometimes still referred to as P6, but this is for old reasons. Once you have received the notifi­cation, you should access the new tax code in the Tax Code Notices section of your payroll software, PAYE Online or the HMRC PAYE Desktop Viewer appli­cation.

Use the details to update the employee’s tax code to include previous wages and taxes if you received these numbers with the new tax code. The new code should be used from the first payday following receipt of the notifi­cation unless you are notified otherwise.

P11

An outdated form that was once required for payroll. The P11, also called a deduction worksheet, was a way to record infor­mation about all the payments and deduc­tions you make to your employees. P11 records were required to be retained if you paid an employee a salary at or above the lower earning limit or if your employee has a tax number.

P11D

Also known as an expenses and benefits form, employers use this form to file an annual accounts report with HMRC for each employee or director to whom the company has paid expenses or benefits. Sometimes these are also referred to as benefits in kind. Examples could include company cars, health insurance, childcare or travel and enter­tainment costs.

However, the reporting rules can be compli­cated. There is also Form P11D(b), which allows you to specif­i­cally declare the amount of Class 1A National Insurance Contri­bu­tions (NICs) due on expenses and benefits you have provided to your employees.

P45

Alongside P60, P11D and Starter Checklist, one of the main payroll forms still in use even though the Real Time Infor­mation System (RTI) has made most other forms obsolete.

If someone stops working for you, they must be given a P45 form. This is a legal requirement. It shows how much tax they paid in the current payroll year and includes other infor­mation about them, such as: B. your social security number and your address. They then present the P45 to their new employer or to Jobcenter Plus if they are looking for work. This allows your new employer to integrate you into their payroll system without much effort.

A P45 consists of 3 parts. When you hire a new employee, you will receive Parts 2 and 3. They will keep Part 1A for their own records.

It’s a good idea to get a new employee to complete the starter checklist regardless of whether they provide a P45, as the checklist provides additional infor­mation to the P45.

P60

One of the most important payroll forms alongside P45, P11D and the Starter Checklist, still in use even though the Real Time Infor­mation System (RTI) has made most other forms obsolete.

A P60 shows how much tax, NICs, student and postgraduate loan deduc­tions and total statutory payments an employee paid during the tax year. As an employer, you must pay a P60 to every employee who worked for you at the end of the payroll year. This can be done on paper or electron­i­cally, but must be done by May 31st following the April 5th end of the payroll year.

The P60 is part of year-end payroll and the May 31 deadline gives individuals plenty of time to check the details before poten­tially filing a tax return.

Employees need their P60 to prove how much tax they have paid on their salaries and to make any claims, for example:

• the recovery of overpaid taxes.
• Applying for tax credits.
• as proof of income when applying for a loan or mortgage.

A P60 contains details of income and deduc­tions, including National Insurance Contri­bu­tions (NICs) and taxes. These are important elements needed by employees. Failure to deliver P60s within the allotted time may result in an inves­ti­gation by HMRC.

RTI – Real-time information

Real Time Infor­mation (RTI) was intro­duced in April 2013. Under RTI, employers must send Pay As You Earn (PAYE) infor­mation to HMRC every time they pay their employees, rather than waiting until the end of the pay year. This must be done through payroll software. RTI is used when you pay your employees weekly, monthly or even quarterly.

You must make two types of filings: a Full Payment Submission (FPS) and/or an Employer Payment Summary (EPS). Usually only one FPS is required.

If you outsource your payroll to an accountant or payroll service provider, you should ask them what they will do to ensure your business is RTI compliant. Both employee and worker payroll details should be sent via RTI.

Shared parental leave (SPL)

After the birth or adoption of a child, parents are entitled to up to 50 weeks of shared vacation. This is known as shared parental leave (SPL).

The vacation can be taken in one go or staggered over a longer period of time in 3 separate blocks for each parent (so a total of 6 blocks possible).

There are criteria that must be considered for accep­tance of SPL, such as whether both parents share respon­si­bility for the child at birth or adoption date, and there are both work and salary criteria. Both parents must be employees and not workers.

To apply for SPL, parents must complete the SPL forms created by Acas and send them to you. Similar to statutory maternity leave, where employees are entitled to contact mainte­nance days (KIT), those taking SPL can return to work for up to 20 days during their leave without affecting their rights. These days are known as Shared Parental Leave In Touch (SPLIT) days and as an employer you must agree to them.

Starter checklist

The starter checklist should be used to gather infor­mation about a new employee. You enter the details provided into your payroll system and do not need to send the starter checklist yourself to HMRC.

The starter checklist can be completed online or a paper copy can be printed out for the employee to complete and return to you.

Statutory maternity leave

Eligible employees are entitled to maternity leave. This right is enshrined in law. Employees’ existing rights are also protected during the vacation period, such as the right to salary increases. The right to vacation and the right to termi­nation are also protected. Statutory maternity leave is up to 52 weeks.

The first 26 weeks are referred to as normal maternity leave. The last 26 weeks are referred to as additional maternity leave. Of course, the employee does not have to take all 52 weeks, but he does have to take 2 weeks of vacation (or 4 weeks if he works in a factory).

Employees are allowed to work up to 10 Keeping-in-Touch (KIT) days during vacation. Both employees and employers must agree to this as well as the type of work. Crucially, contact mainte­nance days have no impact on the rights granted by statutory maternity leave. The vacation can begin as early as 11 weeks before the expected birth.

In the event of a premature birth, the holiday begins the day after the birth. If the employee suffers from a pregnancy-related illness, care can begin 4 weeks before the week of the birth (starting on a Sunday).

In order to take advantage of maternity leave, the employee must give notice at least 15 weeks before the due date. You can request that this be done in writing, but you can also accept oral commu­ni­cation. However, you must then confirm the start and end dates in writing to the employee within 28 days. You can request proof of pregnancy, including a letter from the doctor or midwife, or the MAT B1 certificate issued to you by a healthcare profes­sional.

If an employee wishes to change the time of their return to work, they must notify you as the employer at least 8 weeks in advance.

Statutory Maternity Pay (SMP)

Those entitled to Statutory Maternity Pay (SMP) may be entitled to up to 39 weeks during leave. This usually starts when the employee goes on holiday, but can also start automat­i­cally if the person is unable to work due to a pregnancy-related problem in the four weeks before the birth week.

As an employee, you may need to arrange this in the employee’s absence. Taxes and social security must still be deducted from the SMP.

The amount you have to pay is as follows:

• 90% of the employee’s average weekly earnings before taxes for the first 6 weeks
• An amount set by the government or 90% of average weekly pre-tax earnings (whichever is lower) for the next 33 weeks.

There is a statutory maternity pay calcu­lator on the government website that you can use to calculate an employee’s salary. Different eligi­bility rules apply to some worker classi­fi­ca­tions, such as temporary workers, educators and directors.

Statutory shared parental allowance (ShPP)

In addition to Shared Parental Leave (SPL), new parents may be entitled to statutory Shared Parental Pay (ShPP) for the duration of the leave. This right applies to both parents of the child.

As an employer, you must pay ShPP like any other statutory salary. Eligible parents can claim up to 90% of their average weekly income for the relevant period or an amount set by the government, whichever is lower.

Statutory sick pay (SSP)

Eligible employees are entitled to at least a set amount of their weekly wages from their employer if they are too sick to work for more than four working days in a row. This is known as Statutory Sick Pay (SSP). You are entitled to up to 28 weeks. The government sets this minimum rate.

When an employee files a claim, you must pay them starting on the 4th day of the sick leave period (the first 3 days are called “waiting days”). An exception is if the claim relates to a further period of illness within 56 days of an earlier period. This is called a linked period and payment is due from the first day of the linked period. Taxes and National Insurance Contri­bu­tions (NICs) are deducted from this wage.

To be eligible, the person must be an employee, not a worker, and have completed some work for you (i.e. new employees cannot make a claim before they start work). Employees must earn, on average, the below-earnings limit per week.

If the employee has already claimed the maximum SSP amount (28 weeks in the working year), you do not have to pay them SSP. Additionally, they may not be eligible for SSP if they are already receiving statutory maternity pay.

You can ask the employee to provide a certificate from a healthcare profes­sional if he is sick for more than seven days in a row, including days off (weekends). A doctor can provide a fitness certificate (also known anecdo­tally as a sick note), but you can also choose to accept an Allied Health Profes­sional health and work report from another medical profes­sional, such as a physio­ther­apist, podia­trist or occupa­tional therapist.

As an employer you can offer more through your sick pay scheme, but it is illegal to pay less. Check out our guide to SSP.

Tax codes

Tax codes are part of the Pay As You Earn (PAYE) system and are used to calculate how much tax to deduct from an employee’s salary. When you hire someone, use their P45 to determine their tax code, and your payroll software should be able to help you determine this. Typically, you need to update tax codes at the start of a new tax year.

Additionally, HMRC will send you an email notifi­cation if an employee’s tax number changes and needs to be updated. You should make these updates as quickly as possible.

Tax codes consist of numbers and letters. The figures show how much personal allowance an employee is entitled to in this tax year.

In most cases, the total amount of taxable income is the number in the tax code multi­plied by 10. For example, an employee with tax code 1250L can earn £12,500 before being taxed. The letter points out the personal allowance and the method of tax deduction.

The full list of tax laws and their meaning can be found on the government website.

employees

Labor law differ­en­tiates between workers and employees.

Workers are typically identified by having a contract detailing the work or services they must perform for you. However, like with an employee, this does not have to be a written contract. Employees often have casual or irregular employment.

Employees have some of the same rights as employees, such as receiving the minimum wage and statutory paid vacation. However, they are generally not entitled to a minimum notice period, no protection against dismissal (or no statutory severance pay), no right to flexible working hours or to leave for emergencies.

The difference between an employee and a worker is subtle and you should seek an expert opinion when in doubt. Denying a worker their rights because you believe they are an employee could result in litigation.

Avoiding payroll errors

Quality assurance is critical to payroll perfor­mance. Mistakes will happen. Your job is to ensure that systems are in place to reduce errors where possible and to quickly correct errors when they occur.

Common payroll errors in the UK include:

• Your PAYE invoice is incorrect
• Errors in your Full Payment Submission (FPS) or Employer Payment Summary (EPS)
• Paying an incorrect amount to HMRC
• Incorrect employee payments and/or deduc­tions