A crucial administrative task for many businesses – correctly calculating payroll tax is often overlooked as a mission-critical process. However, with so much importance placed on it, it is vital to understand how much you are expected to pay, potential risks, and how validating it can be made

So, how much payroll tax is applied to a business and what are some of the key wrinkles to avoid?

What is payroll tax and how much should I pay?

Payroll tax, or Pay as You Earn (PAYE) is money that is automatically taken from employee wages to account for taxation. The system is designed to capture two key strands of payment – income tax and national insurance contributions.

As with any taxation, this is evaluated based on income and if none of your employees earn more than £120 per week, you are not required to register for the service with HMRC. However, if your employers are outside this threshold, you can quickly find yourself overwhelmed as you put in place
a system to properly track their contributions over time.

On income over £12,500, employees will be taxed at the basic rate of 20% for earnings between £0 – £37000. Above that employers will enter the higher rate band of 40% for earnings between £37501 – £150000 on income over £50K. Finally, employees earning over £150000 will be subject to the
additional rate of 45% – all while factoring in unique allowances for employees.

When it comes to national insurance contributions, these are split into two distinct strands – those that are deducted directly from an individual’s pay as Employee’s contributions, and those that are paid by you the business owner as Employer’s contributions. These are dictated by the individual’s
category band that can be viewed in full from the official government guidance. These are made up from seven distinct categories for employers and employees, making it vital to keep track of what is owed from each employee and you the employer.

These are paid either monthly or quarterly and should be subject to the highest level of oversight, with missing or incorrect payments often causing significant problems for businesses of all sizes.

What risks are there?

Failing to calculate PAYE correctly can often be a huge risk to any business if not handled correctly. Every company is required to directly report on their payroll to HMRC before or on the date of each payday. Depending on the size of your organisation, you can negotiate to move your payments from a monthly to quarterly rota, but this can often be difficult to determine and confirm.

Failing to properly report on PAYE can quickly result in investigation from HMRC, resulting in fines, interest on payments and more. This can quickly eat up additional resource as you move to address the issue, resulting in additional expenditure, potential reputational damage, and even legal action.

In addition, any changes to payroll such as taking on new staff, raises, and key state changes for employees such as retirement or significant promotion should also be lodged. Failing to do so can result in additional complications – costing you additional time and effort to resolve.

How can a digital solution help?

If your team is struggling to organise your payroll work, choosing to deploy a software solution can help streamline painful tasks and provide helpful functionality to minimise resource expenditure.

Some potential advantages include:

Automation: Any quality software solution will allow your processors to streamline difficult tasks or actions. This can be as simple as automatically calculating complex formula, uploading data to cloud storage, or providing prompts and reminders for essential tasks. This will also allow you to customise the system to match your current working practice to allow for easy onboarding and taking ownership of system maintenance and updates.

Payroll Delivery: Using an online platform allows greater control and efficiency when it comes to the storage and distribution of payroll information. A reliable platform will be able to send payroll information in a suitable format to HMRC through email or in a filetype of your choosing – with many systems able to export in XML, PDF, and other widely used formats. This can also enable you to send payslips to your employees and export key statistics about payment details to allow for oversight and payment control.

Validation: While your teams may be highly experienced, mistakes are inevitable when humans are involved. Any quality system will have a number of steps enforced in the payroll calculation process, allowing you to avoid common errors and ensure that typos, incorrect figures, and mis-clicks are not included. These can be deployed in a way that doesn’t slow seasoned users down and makes onboarding quick and simple for new members of staff.

Compliance: In addition to HMRC rulings that payroll information must be stored for up to three years, GDPR compliance is a key concern for many businesses. Replacing the 1998 Data Protection Act, GDPR covers sensitive information or figures that could be used to identify individuals – such as
names, addresses, and NIC details that are present on many physical or digital payslips. Failing to store and handle this data correctly can result in investigations, fines, and the loss of reputational trust. Choosing a suitable system will allow you to remain secure and GDPR complaint at all times –
ensuring that your work is safe from error, investigatory review, or punitive legal action.

What next?

If you want to learn more about how a software solution can help resolve your PAYE issues, our team at Practical Software are here to help. With many years’ professional experience, our teams work with you to provide a tailored solution that suits your unique business needs and challenges.
You can view our full range of services from here. Or if you have
specific questions or queries, you can get in touch directly and let us
know exactly what you need to resolve your payroll issues.