What do accountancy students need to know about UK payroll compliance?

From common PAYE terms to National Insurance contributions, here are some of the things that AAT students may find useful when it comes to UK payroll.

UK payroll compliance is – in many respects – one of the most important ‘administrative’ obligations of any UK-based employer. It is also an area where errors are relatively frequent where the tax and National Insurance Contributions (NICs) at stake can be significant. This guide provides an initial insight into the core terms, deadlines and skills associated with UK payrolls.

When is pay-as-you earn (PAYE) due?

As an initial premise, employers need to account for PAYE on all the payments that they make to their employees. Organisations also need to consider whether someone is an employee for tax purposes, or whether someone’s status (from a labour law perspective), is not relevant. It is quite possible that someone could be regarded as ‘self-employed’ and/or an employee for tax purposes. 

While the tests on whether someone is an employee for tax purposes can be quite subjective, HMRC does have an online tool here which provides a marker as to whether someone is an employee or not for PAYE purposes. This tool gives a useful indicator, but additional analysis may be needed.

Common PAYE terms and their meaning

• Gross pay: this is all of the cash earnings (pay, bonuses, commissions, overtime etc.) to which an employee is entitled to. This does not include any deductions (PAYE, NICs, employee pension contributions). Private pensions paid to retirees are also subject to PAYE.
• Net pay: this is the amount that an employee earns after PAYE, NICs, pension contributions etc. have been accounted for. 
• PAYE tax code: this is the code which is applied to all employee’s pay and indicates the personal tax allowance (tax free amount) that employees are entitled. The standard code is 1250L, which would indicate that the employee has a personal tax allowance of £12,570 for the tax year. 
• Real time information (RTI): this refers to the monthly (electronic) declarations that the payroll provides to an employee for each pay period. The RTI declaration needs to be made ‘on or before’ the relevant payments have been made to the employees.

• Form P60: this is the certificate which is produced at the end of every tax year for every employee on the payroll at that stage. It provides confirmation of their taxable income and PAYE withholdings.
• Form P45: this is the certificate which is provided to an employee when they leave employment during the tax year. One element of the form should be provided to new employers, so that they know what PAYE tax code the individual has been on and what their year-to-date earnings and PAYE are.
• Employee share awards (share options, restricted stock etc.): Where employers provide employees with shares in the company (or a related entity – e.g. an overseas parent business), as a result of their employment. Such awards may create a liability to PAYE, however these should be considered on a case-by-case basis. 

Benefits-in-Kind (BIKs) 

There is presently no standard obligation for employers to include employee BIKs (e.g. private medical insurance, private travel insurance or a company car) within the employee payroll reporting process, although they can include this in the payroll with HMRC’s approval.

However, those employers that don’t report any BIKs which are provided to employees through the payroll, will need to produce a Form P11D for each employee to report the deemed ‘cash value’ of these amounts to HMRC. The Forms P11D are prepared after the end of the relevant tax year and reported to HMRC on or before 6^th July following the relevant tax year end.

The compulsory payrolling of BIKs is due to start from April 2027.

National Insurance Contributions (NICs) 

In addition to income tax, employers are (usually) obliged to account for NIC withholdings (social security) on the gross pay provided to employees as part of the overall payroll reporting process. Key points to understand include:

• NICs include both employee NIC (primary contributions) and employer NIC (secondary contributions).
• Certain employees will not be liable to either primary or secondary contributions e.g. many foreign employees who are assignment to the UK may have no liability to NIC for various reasons.
• UK-based employees who are either under 16 or over 66 will not be liable to employee NICs, but secondary NICs will still arise for the employer on their earnings.

Business expenses and round sum allowances

Qualifying, legitimate business expenses which have been incurred wholly, exclusively and necessarily in the course of business can be reimbursed to employees without incurring a PAYE or NIC liability. 

However, those employers which provide employees with ‘round sum allowances’ instead of receipted business expenses to cover business travel and similar cost will innately need to subject these allowances to PAYE and NIC. Individual employees may then be able to submit a tax relief claim to HMRC at the end of the tax year, where they have incurred qualifying business expenditure.

Pension contributions 

When assessing whether an employee’s pension contributions are included within ‘gross pay’ or not, it is important to note that the precise conditions associated with the pension scheme can impact how these contributions need to be reported for payroll purposes.  Key examples in this regard include:

• Pension salary sacrifice arrangements: with these arrangements, the legal salary of the individual for PAYE / NIC purposes is adjusted and hence PAYE / NIC will only be applied to the reduced salary after the salary has been adjusted for the pension contributions.
• Employee contributions to a personal pension scheme (or Group Personal Pension Scheme): will not adjust the employee’s salary for PAYE or NIC purposes. Basic rate tax relief is claimed directly from the Government via the relevant pension fund, whilst any additional tax relief which is due (for 40% or 45% taxpayers) on these contributions is obtained via their personal tax return.

Payroll timings

The PAYE and NIC should be transferred to HMRC by the 22 of the following month (i.e. 22 September for August withholdings). This assumes the payments to HMRC are made electronically, otherwise the payments need to be with HMRC by the 19 of the month.  If the 22 or 19 falls on a weekend or bank holiday, the payment should reach HMRC on the previous working day to avoid the risk of late payment penalties.

The wider personal skills needed in payroll  

Finally, working in payroll isn’t just about ‘technical skill’ and knowledge of the core rules. It also requires a wide range of personal skills and attributes including attention to detail, solid administrative and process skills, confidentiality and the ability to work with other parts of a firm closely while staying calm under pressure. Key soft skills need to be adopted to bring success to your role, including active listening, empathy and problem solving.

Further reading

Where can an AAT qualification take me in my career?

Accounting software: analysis tools to make your life easier

How to feel part of the community when studying remotely

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