What Is A Payroll Process?

Exactly what is a payroll process? The very short answer is that a payroll process is a cycle that takes place to ensure employees are paid correctly and on time, and in line with all legislative requirements, by the employer. It involves making sure that all deductions are calculated correctly with payroll taxes being paid through the Pay As You Earn (PAYE) system to Her Majesty’s Revenue and Customs (HMRC).

The payroll process also includes the fulfilment of all report filing requirements relating to employee payments and any changes in employee status. The process is the same, no matter how regularly employees are paid.

Even if an employer only has one employee they will need to follow a payroll process to ensure all payments and deductions are made correctly. The following are some of the most fundamental parts of a payroll process:

When a new employee joins a company, employers must apply the correct tax code and obtain the employee’s national insurance number. This information is provided on the P45 from the previous employer or the Starter declaration if a P45 is not available. Once the employee is set up, the employer can pay them and work out the taxes and deductions that must be made each time.

The first payroll tax deduction is national insurance. Employers have to pay this on their own behalf and on behalf of their employees once their earnings cross the set threshold.

Income tax is another deduction that must be made. Employees earning above a certain level will have income taxes deducted via the payroll process. There are different tax bands that apply according to each employee’s earnings.

Part of the payroll process will also include employers making other deductions for things like pension contributions, child maintenance and student loans. Statutory payments (statutory sick pay, statutory maternity pay, statutory paternity pay and statutory adoption pay) are also processed via the payroll.

When employers are recovering those payments, they can do it by reclaiming the amount through a corresponding reduction of their monthly payroll tax payment to HMRC.

Real-Time Information (RTI) is the system used for reporting payroll information online to HMRC. Payroll data must be reported via what is known as the Full Payment Submission to detail all payments and deductions made. It needs to be sent before or on the same day that employees are paid.

If an employer does not send its Full Payment Submission on time, it could get a late filing notice from HMRC and be charged a penalty. Everyone who is paid by the employer needs to be included, even those who earn less than £120 a week (which is under what is known as the lower earnings limit where employees do not pay national insurance). In the next tax month, which starts on the 6th, employers can use an Employer Payment Summary to claim any reduction on what is owed to HMRC.

While most employers these days will make all of their payments online, it doesn’t have to be done that way. Employers need to make sure that the most recent pay deductions are sent to HMRC by the 19th of every month if paying by post, and by the 22nd if paying electronically.

Another important aspect of understanding what is a payroll process is being aware of the obligation to provide a payslip to every employee every time they are paid. The payslip should set out their gross and net pay, deductions made, and hours worked if pay varies depending on how much time has been worked. Payslips can either be printed or sent electronically.

Keeping on top of the various aspects of the payroll process is undoubtedly highly challenging. We’ve provided a summary of the main points to explain the key points of what is payroll process, but every company will have its own specifics. Some payrolls will be fairly straightforward, but other employers will need to stay on top of issues such as pay scales, union agreements, overtime, time in lieu arrangements, shift pay and so on.

The variations that happen every month such as employees starting, employees departing and employees taking leave will also add to the challenge.  As does the fact that employers must continually keep themselves up to date on changes in payroll legislation, and then implement those changes accurately and in a timely fashion.

One way that many employers are making the payroll process a lot more straightforward to manage is through the use of cloud-hosted payroll software. These solutions provide a broad range of features that increase payroll accuracy, reduce the risk of errors and help employers ensure that all aspects of their payroll processing are fully compliant. Software such as ours is also designed to deal with all of the demands of RTI filing to HMRC and other obligations such as Pension Auto Enrolment. There are many other benefits too, including having the ability to rapidly generate accurate reports built on real time data for use within the organisation.

Some employers might ultimately decide that they would prefer to leave the running of their payroll in the hands of experts and opt instead for an outsourced payroll provider to take care of everything on their behalf.

We hope we have helped you to understand more clearly what is a payroll process and the various steps that are required to run it. It is really important to get every element of the payroll process correct. Otherwise, you could end up making errors that can be upsetting to your employees, time consuming to fix and can even result in penalties.

If you’d like to explore how payroll software can help you run your payroll more smoothly, then please do contact us for a discussion about how we can help. And if you feel that you’d like to chat through how a partially or fully outsourced payroll solution might work in your company, then we’d be very happy to explain more.