Regardless of whether you are the director of a limited company or the owner of a sole trader business, if you employ people then it is a statutory requirement to operate a PAYE scheme via HMRC. This enables statutory deductions such as tax and NI to be made from an employee’s pay. Most people are familiar with these primary deductions because they apply to the majority of employees but there are some deductions that may be less familiar. It is important that employers are aware of and know how to treat all statutory deductions.
In addition to the most common payroll deductions mentioned above there are many others. One example is ‘deductions from earnings orders’ in respect of council tax arrears, non payment of child support or some other debt. These are usually issued as a result of a court order following an employee’s failure to meet certain legal obligations. An employer may also be required to make deductions in respect of a student loan repayment which will become due when an employee earns over a specified amount. Deductions may need be made in respect of a pension scheme. Since 2012 it has become compulsory for most employees to be automatically enrolled in a pension scheme by their employer. Some employees may also wish to make additional voluntary (pension) contributions known as AVCs.
The deductions referred to above are known as statutory deductions. They are examples of deductions that employers are legally obliged to make from an employees earnings when certain criteria applies. This is not an exhaustive list and there are many non-statutory deductions that employers may also need to make. These include company loan repayments, company share purchases, saving schemes, charitable donations etc. A deduction can be made from either gross or net pay depending on whether or not it is taxable. Clearly it is important to get this right.
Back in the mists of time it is probable that an employer would have only been concerned with making deductions from their employees’ pay. However, for many years now it has been a requirement for employers to make statutory payments to their employees in particular circumstances. If a female employee satisfies the relevant qualifying rules relating to maternity leave she will be entitled to receive ‘statutory maternity pay’ or SMP.
These days we are becoming increasingly used to the idea of men taking time off work to participate in the arrival of a new baby. In this case an employee may be entitled to receive ‘statutory paternity pay’ or SPP. Some people may wish to take statutory adoption leave in which case they may be entitled to ‘statutory adoption pay’ or SAP. Another statutory payment that employers will routinely make to their employees is ‘statutory sick pay’ or SSP. It should be understood that all of these statutory payments have qualifying rules that must be met.
One statutory payment that most employees take for granted is ‘holiday pay’. It is worth remembering, however, that payment for holidays taken has not always been an automatic right. Also, the entitlement has increased over the years, now applies equally to part-time and full-time workers and has become additional to bank holidays rather than inclusive of them. Both sick pay and holiday pay are examples of deductions that can be either statutory or non-statutory. All employers must adhere to the minimum requirements relating to sick pay and holiday pay but some companies will also operate more generous company sick pay schemes and allow employees to take additional paid holiday. These are ways by which a company can attract good staff or reward them for loyalty e.g. long service. Redundancy payments can also fall into the category of statutory or non-statutory payments.
There are numerous non-statutory payments that a business may wish to make to it’s employees in addition to basic pay. Examples include overtime, shift pay, unsociable hours premiums, bonuses and profit related pay. These payments will, of course, be subject to tax and national insurance in the usual way.
As well as observing statutory regulations it is also important to maintain accurate payroll records as part of the overall accounting records of a company. Payroll is essentially bookkeeping but it is a specialized area and is usually kept separate from other accounting functions. This separation allows for the processing of highly confidential information. Unlike other accounting functions payroll has a close relationship with human resources and their systems are often inter-connected. The payroll function will either have a totally separate system from the accounts system or it will have a dedicated module within the accounting system.
As with any accounting records payroll records are essential for management purposes. A company will certainly want to know what proportion of it’s overall costs are taken up by salary/wage costs. This will vary between different sectors because some are more service orientated than others. The salary costs for a firm of chartered accountants as a proportion of overall costs will be much higher than, say, those of a manufacturing company. Alternatively, a company may want to look at it’s payroll costs as a proportion of turnover rather than overall costs. There are many ways that a business can analyse it’s payroll records. It may look at staff costs in different departments, compare office staff to shop floor workers or contrast staffing costs across different branches.
To summarise companies need to pay employees for their services but they must also make statutory payments and deductions as required by HMRC plus non-statutory payments and deductions as applicable. The later will depend upon company policy. In additional to performing all the correct payroll calculations, which is usually referred to as the ‘gross to net’, a business will need to analyse payroll data as part of it’s financial reportng. In this way it can make wage/salary comparisons with other companies in similar sectors and maintain control over it’s payroll costs.