Every employer has a legal responsibility to operate a paye
scheme for its employees 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 the
payroll requirements for each employee and the additional
paye records required by the Inland Revenue.
Calculating gross pay is not difficult 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 automates this
income tax and nation al insurance calculations reducing
both the time and knowledge required.
Each new employee joining a business must provide the
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.
P45 details are required by the new employer to set up the
payroll records for each employee. 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 administration issues 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 by automating these
calculations saving time and providing accuracy.
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 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 and CEO at DIY
Accounting, designs Accounting Software for small top
medium sized businesses
http://www.diyaccounting.co.uk and Paye Payroll Software
packages for up to 20 employees at
http://www.diyaccounting.co.uk/payroll.htm
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