Completing your payroll and filing PAYE returns may seem time consuming, but you are now required to submit returns online to HM Revenue & Customs (HMRC) 'in real time' every time you pay your employees. We find out if now is the time to start using payroll software or to outsource it
Paying staff is one of your more obvious jobs as an employer, as is sending details of what your people earn with their tax and National Insurance (NI) payments to HMRC via PAYE.
Under the old system, you only had to send the taxman this information once a year. However, you are now required to report that information electronically every time you complete your payroll.
Previously, your main payroll duties were to deduct the right amount of income tax, NI, expenses, student loan deductions and so on, from your employee’s salaries, pay them the rest, send the funds you’ve collected to HMRC, and supply a full account for all your staff at the end of the year.
All firms with more than one employee must use HMRC’s new online Real Time Information (RTI) system. Staff tax, NI and expense deductions must be sent via Bacs before or at the same time you transfer pay — as must full accounts.
So with the new system now in place, we look at three ways you can manage your HR accounts — DIY, software and using an accountant.
In theory, you can do your payroll yourself by hand. Before the RTI requirements came into force, six per cent of employees were paid using a manual payroll system. HMRC's starter pack provides all the information free of charge that you need to calculate your payroll. But calculating pay manually can be fiddly.
You also need to stay up to date with tax changes throughout the year. And so much tax information already has to be submitted online — including VAT returns since April 2012 — that a trip to the Post Office with a brown envelope stuffed with cheques or details for HMRC is probably no longer practical.
Parliamentary officials have cautioned that firms without electronic payrolls will struggle with RTI. Chas Roy-Chowdhury, head of tax at the Association of Chartered Certified Accountants, warns: "These businesses will have to act very quickly to become computerised — it will be essential.
"RTI has been set up to link to the benefits system by providing up-to-date information about claimants’ employment income. So if you make a mistake, your employees might not get the right tax credits.
"And because it’s your responsibility to get pay right, if you underpay tax or NICs, your firm, not the employee, gets the bill from HMRC. So if you have made a mistake from calculating manually, it could cost you.
"Whether you decide to use payroll software, a payroll agency or your accountant, under RTI you will have to file all your information in a very timely manner, including details for new recruits, leavers and so on," explains Chas. "Accuracy and timing will become more important."
Available off the shelf for around £200, most payroll software requires no training to use. It calculates the right pay and generates a payslip for each employee, then pays them via Bacs. You can usually also update staff tax codes and produce forms for HMRC and staff. As a bonus, most systems monitor holiday and sick records and are kept up to date with tax changes.
Software firm Sage's associate product manager Neilson Watts says: "Software will certainly help businesses automate the process of submitting RTI returns to HMRC. It will also ensure data is checked for errors.
"HMRC wants to ensure that quality of data is paramount and are leaning on payroll software providers to help drive improvements. Sage has been working with HMRC for over a year now on RTI. We are providing extensive customer support and using proven technology in our systems, which includes quite stringent data quality checks."
Under the old system, employers only found out at the end of the tax year if they had made the right tax calculations for their staff. HMRC stresses that the new system will ensure the right deductions are made so employers will find out earlier if they have made the right tax calculations. This should mean more employees will pay the right amount of tax and NI. But the system will take time to adjust, so will there be teething trouble?
Neilson suggests there might be: "From the businesses that I have talked to, there is a perception that having to submit details every time they pay their employees will increase the time it takes to do their payroll — the big question is whether or not they want to continue to do their payroll in house."
Small-business owner Angela Pertusini runs a property start-up in London. "I've been thinking about hiring an accountant, because I want to minimise my tax liability. As a new business I don't yet have employees, but when I do take staff on, I would hire help. From the sound of RTI, I'd ask my accountant to do the payroll. It's a no-brainer."
Neilson advises that firms which outsource their payroll speak to their provider sooner rather than later. "Ask them how they have ensured their compliance with RTI and whether it has changed any of their processes," he stresses. "For example, you may find that your provider asks for staff timesheets sooner to ensure that your RTI submissions are delivered on time."
And the long-term view? Neilson concludes: "Under RTI, employers are no longer required to submit year-end returns, so after a little bit of adjusting to a new way of doing things it should make the process of running a payroll more efficient and accurate."
HMRC announced a "relaxation of reporting arrangements for small businesses". According to HMRC: "Until 5 October 2013, employers with fewer than 50 employees, who find it difficult to report every payment to employees at the time of payment, may send information to HMRC by the date of their regular payroll run but no later than the end of the tax month (5th)." HMRC has since announced a further extension of this deadline to April 2014.