Ever wondered how payroll operates and the role HMRC has in distributing your payroll? Understanding payroll can be complicated, with money coming out under the name of random tax codes, it can get a bit confusing, and not to mention frustrating when you don’t know why your money is being taken out of your payroll and what it’s going towards. But don’t worry, Factorial is here to help! This quick guide will talk you through the role of HMRC payroll and the parameters in which it taxes your earned income. This article explores how much money HMRC payroll takes from your paycheque dependent on your income, and what that money goes towards.
- HMRC explained
- HMRC payroll
- PAYE- for employees
- Reporting PAYE to HMRC
- Factorial’s Payroll Feature
- ✅ Download our free UK payslip template to help your company manage payroll
HMRC stands for Her Majesty’s Revenue and Customs. Formed in 2005, it is a non-ministerial department belonging to the UK government and is the UK’s payments, tax, and customs authority. The department is in charge of the payment of state support, the collection of taxes, as well as being the administration of regulatory regimes such as national insurance numbers and national minimum wage.
Its essential purpose is to collect the money that finances the UK’s public services to aid those families or individuals who have targeted financial support. It works to help those in need to receive their tax right.
The HMRC department is responsible for:
- National Insurance Contributions
- Child Benefits
- Tax Credits
- Income Tax
- Corporation Tax,
- Inheritance Tax (IHT)
- Capital Gains Tax (CGT)
- Value Added Tax (VAT)
- Stamp Duty land Tax (SDLT)
- Environmental Taxes
PAYE (Pay as you Earn) is part of HMRC. As an employer in the UK, you have to operate HMRC PAYE software, which forms an integral part of the payroll system.
PAYE is a method that collects your Income Tax and National Insurance from your employment. Each time you are paid money into your account, your employer has the responsibility to send the tax to HMRC. Each payday you will receive a payslip that details your pay, national insurance contributions, and tax.
At the end of the tax year, you will be sent a P60 form- this presents the total amount of money paid to you and the money deducted from the former tax year. The tax year in the UK runs from the 5th of April to the 6th of April.
Income tax or any other taxable income you receive is collected through PAYE. For example, it can be used to acquire tax due on other incomes such as rent. It is also incorporated to collect any other amount of money that you owe HMRC.
Income Tax is an annual tax collected by HMRC and is the tax that you pay on the income you earn. It is used to fund public services such as education, the NHS, welfare systems, and investment in public necessities such as housing, roads, and transport.
This income tax is made of different bands. This is an attempt by the government to make paying income tax a fair procedure for all. Below is a table of the current rate of tax within the UK:
|0%||£0-12,500- no income tax|
|Basic Rate: 20%||£12,501-50,270- you pay 20% income tax. (You pay 20% on the amount above £12,501).|
|Higher Rate: 40%||£50,271- 150,000- you pay 40% income tax. (Again, you pay 40% on the amount above 50,000).|
|Additional Rate: 45%||Over 150,000- You have a 45% income tax for the amount you earn over 150,000.|
National Insurance is a tax made on earnings paid by both employees and employers. This goes towards helping build your individual entitlement towards state benefits such as State Pension (weekly payment that you receive from the government once you have reached a state pension age- the amount you receive will be dependent on how much you have contributed towards it) and Maternity Allowance (payment from the government if you are not eligible for Statutory Maternity Pay). National Insurance also goes towards the NHS, sickness and disability allowances, and unemployment benefits.
National insurance is taken from your pay each pay period (which could be weekly or monthly, dependent on your employee agreement). You start paying National Insurance Tax once you pay over £183 a week (2020-21). The amount of National Insurance you pay is dependent on how much income you earn.
- You pay 12% of your weekly income between £183-962
- You pay 2% of your income above £962
PAYE for employers
As an employer, PAYE must operate as part of your payroll to collect Income Tax and National Insurance.
When paying employees- payments include their salary as well as things like tips, bonuses, maternity or statutory sick pay.
Deductions to employees pay- Deductions from employee pay includes tax (student loan repayments, pensions, child maintenance and payroll giving) and National Insurance. However, as an employer, you do not need to register for PAYE if none of your employees earns over £120 or more a week, receive expenses or benefits or have another job or receive a pension. However, you must still keep the payroll records.
Reporting pay to HMRC
As an employer, you can either pay a payroll provider to calculate payroll for your employees or you can do payroll yourself.
If you sort out payroll, you must use HMRC payroll software to pass on your employee’s payments and deductions to HMRC on payday, or before payday. The role of HMRC payroll software is to calculate how much tax and national insurance your employees owe, also including the employer’s National Insurance contribution on employees who earn above £169 a week. Your reports will tell you what you owe HMRC, you usually have to pay them monthly.
To run your payroll through a software firstly, you must be registered with HMRC as an employee. Therefore, you have to choose a payroll software that reports to HMRC, records employee details and calculates your pay and reductions. It is important to keep all employee records and to tell HMRC about the employees. Additionally, you must also record the payment and make the deductions whilst reporting to HMRC and also pay HMRC the tax and National Insurance.
Consequently, as an employer, you can set up payroll yourself. You can do this by using the HMRC online payment scheme. HMRC has provided a useful guide on how to manage your companies payroll, detailing all the steps and relevant information. There are also many free online payslips available to download online, which facilitates the payroll process.
Factorial’s Payroll Feature
With Factorial’s HMRC Payroll Feature, you can manage all the information that affects your company’s payroll. This includes having all payroll information stored on the system, and constantly being updated with all modifications occurring in the same place. You can download payroll summaries in Excel format, generate personalised reports regarding the payroll, and the option for digital document signing. On top of this, our encryption system and single access for each user guarantee that your data will always be protected.
Or download Factorial’s free UK payslip template. This details all the relevant information that must be included within a UK payslip, to make your life a little bit easier.