If you are an employee your employer has a legal responsibility to operate a paye scheme and provide the employee with regular payslips a P60 end of year certificate and a P45 showing details of gross pay and income tax deducted during the employment if you leave.
An employer needs a paye system that satisfies both these payroll requirements and the additional paye records required by the Inland Revenue.
Calculating an employee gross pay is not difficult for most employers as the rates and hours are usually preset or subject to known information such as a timesheet for example. Calculating the income tax and national insurance can present problems to employers inexperienced in payroll matters who are not familiar with all the paye requirements. Payroll software can automate this part of the paye administration reducing both the time and knowledge required.
When an employee joins a new business they must provide the new employer with a P45 which contains specific essential information that employer needs to start the paye system for that employee. The P45 contains details of the employee name and address, previous earnings and the amount of income deducted by the previous employer. The P45 also states the employee tax code and any special conditions that may have been in force such as being deducted tax on a week one or month one basis.
These details on the P45 are necessary as the new employer needs to initially set up a set off paye records for each employee which can be obtained from the P45. Rather than filing the P45 under a pile of papers or the back of a drawer a payroll software solution adds discipline to this process and permits a permanent record to be kept which can prevent serious paye deficiencies in the future.
Documents and notes on scraps of paper can get lost while paye details kept on a proper payroll software package rarely do and can be backed up as required.
The P45 does not contain details of national insurance contributions as the new employer does not need to know what the previous national contributions were. This is because national insurance contributions are always calculated on a week by week or month by month basis and so previous deductions are not relevant while previous details of income tax deducted are relevant because income tax is deducted on a cumulative basis.
Having established the employee records the main work of the paye system begins. Each pay period the employer needs to calculate the income tax and national insurance to be deducted. This can be done manually or the employer can laboriously enter the employee and previous pay details into a paye calculator to obtain the information. Payroll software is a better choice as these paye functions are automated by that payroll software.
The paye system also requires the employer to keep accurate records of the breakdown of the calculation which are recorded on a P11 deductions working paper. This part of the paye administration is a burden for many small employers and payroll software can automate this task saving hours of work during the year.
Next the payslip which is highly important to employees and the employer has a legal responsibility to provide one. Designing a payslip and ensuring it meets all legal requirements is much easier if a standard legally correct format is adopted as part of an automated payroll software system rather than manually running the paye system.
When an employee leaves they must be given a P45 to take to their next employer and the paye system adopted must provide the information to complete the P45 accurately. It is a foregone conclusion that using payroll software to generate this information can ease the paye burden and provide accurate information satisfying the legal requirements of the paye system.
At the end of the financial year the paye administrative burden is increased if manual records are kept as the employer needs to produce a P14 showing the employee deductions and provide each employee with a P60 certificate showing the employee gross pay and deductions. Payroll software can automatically generate the gross pay totals and the income tax and national insurance contributions providing the information required.
The paye records must also produce the information for the P35 annual employer return showing the income tax and national insurance deducted from each employee and if an employer is operating a manual paye system then this task is often put aside and can lead to returns being filed late and incurring late filing penalties. With a payroll software solution the information is available immediately the final pay period has passed and the figures can easily be submitted online not only saving late penalty fines but also gaining a tax free online bonus.
Using payroll software for the paye administration can not only save time and reduce the paye administration burden but save the employer money too.
Terry Cartwright, qualified accountant in UK designs Payroll systems providing Paye solutions for small to medium sized business with Payroll Software written on excel spreadsheets for up to 20 employees.