What do you need to do for an employee’s payroll?

Author: Russell Smith
July 17, 2015

You’ll need an employment contract first of all (an HR or lawyer can do this for you or you could get a generic one of the web).  This contract will confirm pay and number of holidays.  If you have a part-time employee, make sure you pro-rata the salary.

When they commence employment, you’ll need to first set yourself up as an Employer and set them up as an employee.

You then pay them monthly with a payslip but you don’t pay them like you would a freelancer.

You pay them a monthly apportionment of their annual salary less the PAYE/NI.

This is where it gets tricky.

Say, you hire someone at salary of £2,000.

They start on July 1.

At the end of the month you pay them 1/12 of their salary which is £2,000.

Here is what it will say on the payslip.

 

Gross salary £2,000

Less PAYE (20% after the first £883.33 – £10,600 annually) – £223.33

Less National Insurance (12% after the first £672 per month) – £159.36

Total deductions – £382.69

Net pay £1,617.31

 

You would pay the employee on the last day of the month but you always pay the net pay to the employee.

You then have to pay the following to HMRC by the 22nd of the following month:

PAYE taken from employee – £223.33

National Insurance taken from employee – £159.36

AND

Employers national insurance (13.8% of the amount over £676 per month, in this case £1,324 x 13.8%) – £182.72

Total to pay £565.41

 

So in total you are paying your employee £1,617.31 and the taxman £565.41.  Your total cost for employment is £2,182.72.

Notice, this is more than the £2,000 per month you first thought.  This is because the Employers National Insurance (13.8% over £676 per month

My rule of thumb is think of the salary and add on 10%, this is the true cost of an employee (in this case it is add on 9%).

You can ask an accountant or a payroll bureau to run the payroll for you or you can do it yourself on HMRC software.

I personally recommend getting someone to do it since even if you master the basic deductions above, it can get a load more complicated when you are faced with:

Maternity pay

Sick pay

Holiday pay

Student loan repayments

 

It is also worth getting an HR advisor on board to give ongoing HR and legal advice.

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