How is payroll calculated?
Payroll is a fundamental pillar of any company. It is a list of the company’s employees, and the amount of money that they are paid.
It is essential that payroll is accurately calculated, as mistakes can result in employees being over-paid or underpaid. Or worse – a payroll mistake can land the company in trouble with HMRC.
So how is payroll calculated?
Payroll is calculated by recording each employee’s salary or hourly rate. For salaried employees, a monthly pre-tax total should be established. For those employees who are paid by the hour, each hour of work should be documented along with their hourly rate and any additional pay that they
are owed for working unsociable hours.
If the employee works overtime, carries out extra responsibilities or receives a pay rise, this needs to be updated on the payroll instantaneously to avoid errors further down the line. For salaried employees, the number of hours of overtime should be listed on their payslip.
Similarly, if an employee has taken unpaid leave or has failed to meet the terms on their contract in a way that results in a pay reduction, this needs to be reflected on the payroll.
Next, you have to calculate any deductions that need to be made. These will include income tax, national insurance, and – in some cases – student loan repayments and pension contributions. Any tax relief or company contributions to the pension scheme should also be included here.
You then need to calculate the company’s national insurance contribution. All employers pay a flat rate of 13.8 per cent earnings higher than £183 per week.
Next, you need to produce a payslip for each employee that contains all of the above information.
This provides the employee with a record of their pay, taxation and any other additions or deductions that have been made.
And finally, the payroll manager must report the employee’s pay and deductions to HMRC as a ‘Full Payment Submission’. It is essential that proper due diligence has been carried out before you reach this stage, as payroll errors may result in fines or other penalties. For repeat offenders, payroll errors could lead to an audit by HMRC, which can prove to be a time-consuming, costly endeavour for companies of all sizes.
Calculating payroll is the responsibility of the employer, not the employee, and it is vital that you get it right.
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Online software allows you to keep track of any adjustments or updates that need to be made to the payroll, while also providing you with a potted history of the company’s financial transactions.
If you want to learn more about how payroll is calculated, our team at Practical Software are here to help. With many years’ experience, we work with you to provide the bespoke care that your business deserves.
You can view our full list of services from here.
Or, if you have additional questions or queries, please do not hesitate to get in touch directly and let us know exactly what you need.