AAT L3 Chapter 9 - Operating Payroll

When must an employer provide payslips and in what format(s)?

1. On or before payday for period pay relates to

2. Paper or electronic

What information must a payslip include?

1. Gross pay

2. Taxable pay and pay subject to class 1 primary NIC

3. Income tax and class 1 primary NIC deducted

4. Student loan deductions

5. Employee pension contributions

6. Other deductions from pay

7. Net pay

What is the Real Time Information (RTI) system?

1. System under which employers must submit payroll info to HMRC online every time they pay employee, on or before payday

What is a Full Payment Submission (FPS)?

1. Part of RTI system

2. Electronic report sent to HMRC containing all employee data relating to their pay, including payments to and deductions for all employees

3. Must submit to HMRC on or before payday

When must the FPS be submitted to HMRC?

1. On or before payday

2. Can be early, but

• Not too early, as any changes after this date would require updated FPS

• FPS for new tax year cannot be filled before March of that year

What information must an FPS include?

• Generally:

1. Usual payday - even if actual payment date is different

2. Relevant tax year

3. Total class 1 secondary NIC payable in pay period

4. Employer info

5. Employer’s Accounts Office reference

6. Employer PAYE reference

• For each employee, regardless of level of earnings:

1. Payroll ID - unique number assigned by payroll

2. NI number - if known

3. Title and name

4. Gender

5. Address - if changed or NI number not known

6. PAYE tax code

7. Hours usually worked

8. Indicator of pay frequency - i.e., if paid weekly, monthly, etc.

9. Taxable pay

10. Statutory and non-statutory deductions

11. Net pay

12. Total cumulative taxable pay in tax year

13. Total cumulative tax deducted for tax year

14. Total student loan deductions

• For leavers:

1. Leaving date

• For starters:

1. Start date

2. Address

3. Employee’s starter declaration - used to determine tax code

What is a P45?

1. Form completed by employer when employee leaves job

2. Part 1A is kept by employee

3. Parts 2 and 3 are given by employee to new employer

• If employer uses RTI system, software will automatically inform HMRC of leavers

• If not, copy of P45 is also sent to HMRC

What information does a P45 include?

1. PAYE reference of previous employer

2. Employee personal details

3. Date of cessation

4. Employee tax code at cessation

5. Total pay and tax deducted for tax year

How does the new employer use a starter’s P45 to determine the starter’s tax code?

• If employee has P45 and date of leaving previous employment is in same tax year

1. Use P45 to determine starter declaration

2. Use tax code on P45 until new one is issued for this employer

• If employee does not have a P45 or date of leaving previous employment is in different tax year

1. Must ask employee to determine which starter declaration applies (based on whether starter has had other jobs in tax year)

2. Usually use emergency tax code

How can a new employer use an employee’s starter checklist?

1. Obtain relevant info from employee

2. Provide relevant info needed to be reported in FPS for period

What is an Employer Payment Summary (EPS)?

• Electronic report sent to HMRC that is used to inform them that no employees were paid in the month or to make non-regular claims and adjustments

• Submitted with FPS if employer

1. Reclaims statutory maternity (SMP), statutory paternity (SPP), or adoption (SAP) payments or

2. Claims the employment allowance (can be up to £10,500 for each tax year)

• Submitted in place of FPS if employer

1. Has not paid any employees in tax month

What information does an EPS include?

1. Employer name, PAYE reference and Accounts Office reference

2. Tax year

3. Period EPS relates to - should be at least one tax month

4. Confirmation that

• No employees have been paid in period or

• Of the amounts the employer is reclaiming for SMP, SPP or SAP

When must the EPS be submitted to HMRC?

1. By 19th of month following tax month it relates to

2. Failure to do so can lead to

• HMRC estimating employer’s PAYE liability and

• Penalty charged - if employer then submits missing EPS or FPS, this will replace estimated PAYE liability

When must PAYE deductions be applied to employees’ pay and when must payments of PAYE be made to HMRC?

1. PAYE must be applied at same time as employee is paid

2. Payments to HMRC must be made by

• 22nd of following tax month where payment is made electronically

• 19th of following tax month where payment is made by cheque

3. If employer’s total PAYE and NIC liability < £1,500 per month on average → can make payments under PAYE quarterly

How must PAYE payments be made to HMRC?

1. Electronically if employer has 250 or more employees

What must an employer complete and submit at the end of the tax year?

1. Submit final FPS of year to HMRC, on or before last payday of the tax year

• Must be clear that this is final FPS of tax year

• If no employees paid during final pay period of tax year, EPS must be submitted instead

2. Complete employee P60 forms

3. Complete employee P11D forms

4. Pay outstanding income tax and NICs for tax year

What is a P60?

1. Form given by employer to employees on payroll who are working for them on the last day of the tax year

2. Outlines income tax and NIC that have been deducted from their pay over the tax year

3. Must be provided to employee by 31 May following tax year it is for

What information does a P60 include?

1. Taxable earnings paid by employer to employee in tax year

2. PAYE and NICs deducted

3. Employer’s PAYE reference

4. Employer’s name

5. Employer’s address

6. Employee’s name

7. Employee’s NI number

8. Employee’s tax code

9. Tax year

What is a benefit?

1. Non-cash reward for services provided by employer, such as company car or private medical care

What are the P11D and P11Db?

1. P11D - form completed by employer to report cash value of taxable benefits and expenses for each employee during tax year

• Must be submitted online to HMRC and to employee by 6th July in following tax year

• If employer chooses to payroll benefits (include them in calculation of taxable income so income tax is collected through PAYE), no P11D required

2. P11Db - form completed by employer to report class 1A NICs on benefits due

• Must be submitted online to HMRC by 6th July in following tax year

What information does a P11D include?

1. Descriptions of each benefit

2. Details of cash equivalent of that benefit

3. Employee name, NI number, date of birth

4. Employer name, PAYE reference

When must payment of class 1A NICs be made to HMRC and who is this an expense for?

1. By 22nd July if paying online

2. By 19th July if paying by cheque

3. Failure to do so may result in penalty

• Initial charge is 5% of PLR if 30 days late, further 5% if 6 months late, further 5% if 12 months late

4. This is a cost to the employer. Employees do not pay NICs on benefits

How are penalties issued for late submission of FPS or EPS?

• Penalty charged for tax month where FPS/EPS submitted late unless

1. It is first month in which employer has made late filing in current tax year

2. First FPS was submitted late by new employer but date of submission was within 30 days of due date - this is not classified as a late filing by HMRC

3. FPS is filed within 3 days of employees’ payday, unless this is part of pattern of late filing

• See reference material for penalty table

What is a default?

1. Late payment of PAYE and/or NICs

2. First late payment in tax year is not counted as default - if an employer makes PAYE/NIC payments quarterly, they can only get 3 penalty points in a tax year, so this means their maximum initial penalty is 1%

How are penalties issued for late payroll payments?

1. Penalty may be charged if employer pays PAYE/NIC liability late or if amount is less than amount due

2. Penalty charged depends on amount of defaults

3. See reference material for penalty table

• Further 5% penalty if outstanding tax/NIC is more than 6 months overdue, further 5% if more than 12 months overdue

4. Interest is also charged on late payments, from date payment was due to date payment is made

Give examples of common excuses for late submission/payment of PAYE liabilities to HMRC which are not valid.

1. Lack of funds, unless this was beyond employer’s control

2. Reliance on third party, unless employer took reasonable care

List some powers of HMRC with regards to payroll information.

1. May conduct Employer Compliance Review to ensure employers are meeting their income tax and NIC obligations

• Cases usually selected due to error but random selections also made

Where does an Employer Compliance Review take place?

1. Takes place at employer premises to allow discussions with key members of staff and records to be reviewed

Does HMRC inform employers of an Employer Compliance Review visit in advance?

1. Yes, and employer is required to reply to notice of review

What happens during an Employer Compliance review?

1. HMRC will ask to review underlying records for period covered by review

2. Check employer has properly deducted and accounted for PAYE and NICs

3. Check employer has completed required PAYE forms correctly

4. If HMRC discover error in filings

• Additional PAYE and NICs may be payable

• Interest may be charged on underpayment

• Penalty may be payable - see reference material for penalty table

What legislation or regulations are relevant to the protection of payroll data?

1. General Data Protection Regulation (GDPR)

2. Data Protection Act 2018

What are the data protection principles and why do they apply to the protection of payroll data?

• As payroll data contains data relating to specific individuals and is sufficient to allow identification, data protection principles apply

• Data protection principles are

1. Lawfulness, fairness, transparency

2. Purpose limitation

3. Data minimisation

4. Accuracy

5. Storage limitation

6. Integrity and confidentiality