- Are you looking to understand a bit more about payroll
and the PAYE system
here in the UK?
Are you looking to understand more about the deductions
of tax national insurance,
pensions and other deductions,
perhaps how you get to your net pay
on your payslips, tax codes and those kinds of things.
Are you an employer, entrepreneur, freelancer,
or a director who's responsible for running payroll
for your staff
then look no further than this video today,
I'm gonna go through the basics of payroll
and the PAYE system
and just that little bit more.
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Now, If I was to explain what payroll actually means,
I'm gonna use five simple steps here.
Number one is a process in order to calculate
and report an employee or employees pay.
Number two is to actually then calculate and report
on their deductions.
Namely tax and national insurance.
Number three is to then report
on the employer's national insurance.
This is what the business owners or directors
of the company have to pay in terms of national insurance.
Number four is to produce
and send your employees payslips
on a regular basis.
Most often monthly and number five is to report all
of this to HMRC again on a regular frequency
quite often, monthly.
Now the first consideration in particular,
if you're a director, entrepreneur,
freelancer or business owner,
is how often and for what periods payroll needs
to be run for.
Now, you may be running payroll for yourself
as a director salary
or a business owner salary,
or you may be doing it for your employees.
But the crucial thing here is you've got
to understand what a tax period is, now in terms
of payroll and the PAYE your system,
that tax period differs
from a calendar month.
So for example,
if you're paying your employee 2,000 pounds
in the month of January,
and your intention is to pay them from the 1st
of January to the 31st of January for services procured
in that period,
the tax period does not marry that
the tax period actually runs from the sixth
of the month to the fifth of the month.
So in this example,
the tax code period is the sixth of January
to the fifth of February.
And that's how the PAYE system works.
And also the other key thing is regular practices
that payroll and the PAYE system is run on a monthly basis.
And that's pretty normal practice,
but contrary to belief,
it does not mean that that's what you have to do.
You can actually run payroll weekly.
It can be done daily.
But it also can be done yearly, semiannually, biannually.
So actually there's no defined period,
but the key here is you wanna keep it neat and tidy,
normally doing it monthly,
keeps it tidy,
and your employees are happy if you're doing it
on a weekly basis,
that's all well and good,
but that does increase your administration.
If you're doing it any less frequently than that,
then these are rare circumstances.
Now, in order to run payroll,
if you're an employer, business owner,
freelance and director is you're gonna
need two vital bits of information.
And that is and PAYE reference number
and an accounts office reference number.
Now, what exactly are these?
Well, your PAYE reference number is obtainable from HMRC.
And this is your unique reference number
for your particular business.
No matter how many people you employ, including yourself,
this reference number has to be on every single piece
that can return to HMRC.
The accounts office reference number actually indicates
what accounts office your business payroll is linked
to at HMRC.
So this brings me on quite nicely to tax codes.
Now, if for an employee
or even an employer,
what you may notice on payslips
is a field called tax code.
And quite often it consists of four digit numbers
and a letter.
Now I'm gonna give you an example here.
Most common tax code used in
this current tax year,
which is a 20 to 21 tax year is 1250L here in the UK.
But what exactly does that mean?
Well, let's break it down the first four digits 1250
signifies the level of your personal allowance
I.e the tax free amount that you can earn
in the year without paying any tax of course,
1250 signifies 12,500 per annum.
The letter that follows it signifies the level
of personal allowance
or whether there's a different variation.
So for example,
the L simply means your entitled
to a standard personal allowance.
If you had an M after it,
it means you're then entitled to not
only just a standard allowance,
but the marriage allowances as well and so on.
And there are various letters that can be added
to the four digits.
Now time permits me to go through each and every one here.
But if you follow the link below
in the description,
it will take you
to the gov.co.uk site
where it will list out all the different tax code letters.
And one of the things you may want to do
is just check that you have the correct tax code,
because if it is incorrect,
you may just be paying more tax
than actually you should be.
Now on screen.
What I'm showing you here is a classic example
of a payslip,
and let's just dissect this and go through
this very carefully.
Now you can see a couple of fields
that I've already explained previously.
Number one, it's a tax code,
and there is quite clearly also the PAYE reference number
and the accounts office reference number two
there is also fields of the name
and national insurance number of the particular employee.
And you can also see two additional fields,
one called tax period,
and the other one called the payment date.
Now the tax period
is what I explained earlier.
It runs from the sixth to the fifth of every month.
And that's how tax is calculated in terms
of deductions on this payslip
and every single other payslip.
Whereas the payment date is the actual date that you
intend and probably will pay your employees or yourself.
And that can differ
from the tax date.
And you can see in this example
that the payment date is the 31st of May, 2020.
Now that is the day the employee got paid.
And that is a day HMRC were notified about
this payslip and more than likely,
this payslip will be sent out
to the employee.
And that brings me on
to the dreaded deductions.
(screams)
Now, the common deduction,
as you can see from this payslip is tax
and national insurance.
Now, as I mentioned previously,
it's really important to double check
that you've got the right tax code
so the right amount of tax has been deducted
on a monthly basis.
And national insurance is
what's called class one employees national insurance,
that is the national insurance related to employees.
And what determines the amount of national
insurance you get deducted is based on a category letter.
The most common is a and again,
I'll put a link in the description below
that explains all the different categories and whether you
are being deducted the correct amount of national insurance,
but it doesn't stop there.
There are various other deductions
that can be made through your payslips
and through your gross salary,
student loan deductions, pensions,
charitable giving, child maintenance payments are just a few
that can actually be deducted directly
from your payslip.
And once all the deductions are made,
you get to what's called a net paid figure,
and that net pay is what physically gets paid
to your employee.
Or if you're a director freelance entrepreneur,
and you're paying yourself to you.
Now the question is how can you run payroll and
issue payslips on a frequent basis?
Well, there's a plethora of different pieces
of accounting software out there that you can possibly use.
And also HMRC have developed their own unique software,
which you can also use.
However, I must warn it is a little bit clunky.
So if you are running payroll monthly,
what you've got to decide is the payment date.
And it's the payment date on which you need
to issue the payslips,
make sure payment is made and report
to HMRC using the RTR return system
that is Real Time Returns.
And when you report HMRC,
there are two types of returns
that can be made.
One is called an FPS and the other
is called an EPS.
Now, let me just focus on the FPS to begin with.
So an FPS is what's called a full payment submission.
This is where quite often you
are paying your employees a significant amount,
normally over 120 pounds a week.
And by making the submission,
it goes into a lot of details
and HMRC receive all of this
and it must be done monthly.
But the one thing to be aware of is late submissions.
You've got to be very, very careful here.
If you make a submission on
or before the payment date,
you're absolutely fine as long
as it's before the end of the tax month.
But if you're late in doing that,
then you will more than likely get subject
to quite a hefty fine,
and they can be up to 400 pounds.
There are very few circumstances
in which HMRC will be lenient
with late submissions.
And if they're done frequently
then you're really going to get into a lot of hot water.
So the other type of return
is what's called an EPS.
That's an Employer Payment Summary.
Now this doesn't have to be done every month.
This only has to be done
in certain circumstances listed here
on the screen right now.
So once you've made your FPS or EPS submission
to HMRC through your software,
then you've got to ensure
that they get their payment,
their tax and national insurance payments,
and must be made by the 19th
or if you're doing your online the 22nd
of the month following the tax month,
now that's a bit confusing.
Let me break it down.
Let's say, for example,
your tax month is the sixth January
to the fifth of February.
Now you've made the return on the 31st of January,
because that's the day you paid your employees,
not a problem.
Then you've got some tax and national insurance
to pay HMRC.
Well, you've got to make sure you get
that paid by the 22nd of February at the latest it's got
to reach their bank account.
They normally say the 19th,
but you have got till the 22nd.
Now what happens if you make a mistake
or submit a late return, you see,
there are exceptions in terms
of sending a late FPS report.
And it's here on the screen.
There's certain situations here on the left and went
to report on the right.
But if you're not within these exceptions,
then you are more than likely going to get fined.
And the penalty regime can be quite onerous.
Don't forget, this is a monthly penalty
so if you do it frequently,
you're gonna get fined
that amount every single month.
Ouch, so if you have one to nine employees,
your monthly penalty is a hundred pounds,
10 to 49, it's 250 to 249, 300 and 250 or more
it's up to 400 pounds.
That's quite a stink.
Now the most onerous thing about payroll
is making a mistake.
Now it's more than likely unintentional or accidental,
but the consequences can be quite painful.
So for example,
if you entered the incorrect gross salary
or made the wrong deductions or incorrectly filled in one
of the other bits of information,
and you've actually submitted it to HMRC on time, well,
you're certainly not gonna get a penalty,
but if it turns out incorrect unwinding
that is where the problem actually lies.
And quite often it involves picking up the phone
onto HMRC and untangling things in that way
or alternatively, you can actually straighten out
in future months,
but that really does depend on your situation and
how your employees would feel about that.
And finally, what happens if your employee,
or even your own circumstances change
and details actually change.
Now, this actually applies to new employees
or employees leaving,
or your circumstances your details changing
your pay going up,
you pay going down, your tax code changing
and all sorts of things.
For all sorts of employee changes also needs
to be reported to HMRC
and that also includes the issuance of P45s and P60s
now, if they sound like some sort of car glue to you,
then I don't blame you,
but I can't really go it in this video,
there will be a future video
that will explain P45s and P60s.
Once again, I really hope you found
this video useful,
an introduction to the basics of payroll
and the PAYE system in the UK,
specifically for you directors,
business owners, entrepreneurs, freelancers,
and employees out there.
And the golden nugget that you really want
to be taking is check your tax code,
a wrong tax code could end up
in overpaying tax unnecessarily.
And if you would like some assistance with your payroll,
or just wanna get your tax code checked out,
then there's a link below here,
which you can click
that will hit our website
and there is a service that we offer for both.
So until the next video,
I really, really wish you a wonderful day ahead.
(shatters)