AAT L3 Chapter 8 - Employer Responsibilities for Payroll

When does the tax year start and end and what calendar year is it named after?

1. 6th April to 5th April

2. Named after calendar year in which it starts

What is PAYE?

1. Pay As You Earn - system by which deductions are made from employees’ pay and paid to HMRC

• Employer’s responsibility to deduct income tax and class 1 primary NICs from employees’ gross pay

What is income tax?

1. Tax paid by employee on taxable pay and benefits

What are class 1 primary NICs?

1. Tax paid by employee on cash earnings (salary/wage)

What are class 1 secondary NICs?

1. Tax paid by employers on employees’ cash earnings (salary/wage)

2. Additional cost for employing staff

3. Employment allowance of £10,500 → if employer’s total class 1 secondary NIC liability for year is less than £10,500, no class 1 secondary NIC due

What are class 1A NICs?

1. Tax paid by employer on taxable benefits provided to employee

What are tax codes used for?

1. Incorporates deductions and allowances available to employee

2. Most common tax code gives personal allowance (tax free income) of £12,570

3. Used to spread employee’s allowances evenly over tax year. Excess is then charged income tax

When must a business register as an employer and by what time?

• Must register if any of its employees (even if only one employee)

1. Are paid £96 or more per week

2. Are provided with benefits

3. Receive pension

4. Have another job

• Must take place

`1. Before first payday but

2. No more than 2 months before starting to pay employees

3. If not, then penalty may be charged

What does HMRC give a business after it has registered as an employer and within what period of time?

1. Issues business with employer PAYE reference number (ERN) to be used on payroll records

2. Takes up to 5 working days to be issued after online registration is complete

What records must an employer keep to support payroll, in what format(s), and for how long?

• In either digital or paper format:

1. Reports to HMRC

2. Amounts paid to employees

3. Taxable benefits and expenses

4. Tax code notices

• Must keep for at least 3 years from end of tax year to which they relate

• Failure to do so can lead to HMRC estimating amount owed and charging penalty of up to £3,000

What tasks does payroll software help with?

1. Calculating employees’ pay and deductions

2. Reporting payroll info to HMRC online and in real time

3. Updates should be run to ensure submissions contain correct tax rates for tax year in question

When does a business need to use free or purchased HMRC payroll software?

1. Free for employers with fewer than 10 employees

2. Purchased for employers with 10 or more employees

What is the name of HMRC’s free payroll software package?

1. Basic PAYE Tools

What is pay rate?

1. Amount of money employees are paid either for unit of time (e.g. hour, day, week) or for each item made

What is gross pay?

1. Total amount earned by employee for period in question before deductions are made

What is taxable pay?

1. Amount of employees’ earnings for period on which tax is charged

2. Personal allowance deducted from gross pay before calculating income tax

What is net pay?

1. Amount of pay after deductions such as income tax and class 1 primary NICs are made

What are statutory deductions? Give examples.

• Deductions from pay that employer must make and pay to HMRC before earnings are paid to employee, e.g.

1. Income tax

2. Employees NIC (income tax is calculated before deduction of NICs so NICs do not get income tax relief)

3. Employees’ workplace pension contributions

4. Student loan repayments (once employee is earning over relevant threshold)

When must a business enrol an employee into a workplace pension and when can an employee opt out?

• Mandatory under Pensions Act 2008

• Must enrol employees if

1. Working in UK

2. Classified as worker

3. Aged 22 to state pension age

4. Earning at least £10,000 per annum

• Employee can opt out within first month of being enrolled

Are employer and employee contributions to a workplace pension classed as taxable income for employee?

1. Employer contribution is not classed as taxable income for employee

2. Employee contribution is treated as allowable income tax deduction (it is deducted from pay before income tax is calculated)

What are non-statutory deductions? Give examples.

• Deductions which may be made from employees’ pay if they have written authorisation from employee or are included in employee’s contract of employment, e.g.

1. Till shortfalls or breakages

2. Life insurance payments

3. Trade union membership

4. Charitable donations

5. Savings schemes

6. Private medical insurance

• Most voluntary deductions are not allowable income tax deductions, except charitable giving under Give As You Earn (GAYE)

What is Give As You Earn (GAYE)?

1. Employee instructs employer to make regular deduction from their salary and pay this amount to their chosen charity

2. Employer deducts agreed amount before calculation of income tax on employee’s earnings, so it is treated as allowable income tax deduction