Payroll Tax and Outsourcing Your Payroll

And Why Independent Professionals May Be Missing Out on Tax Efficiency.

A significant number of independent professionals such as IT contractors, who operate as sole-directors for their limited companies, are potentially missing out on being more tax efficient by not running their own payroll.

Whilst tax and in particular payroll isn’t necessarily the most exciting of topics, it is one that we recommend a small business owner discusses with their accountant.

Operating a payroll can enable a business owner to reduce their corporate tax bill and can ensure they use their personal tax allowance effectively.

But what is a payroll?

In its simplest form a payroll is the list of a business’s employees and the amount they are to be paid. Periodically a business will “run the payroll” which means that it calculates the distribution of the wage and salary payments (either manually or electronically), and as a result the payroll holds the financial record of all wages and salaries including the total record for the financial year.

Where does PAYE fit into payroll tax?

For those of you now asking the question where does PAYE fit in to the picture?  The Pay As You Earn (PAYE) scheme is the HMRC mechanism for collecting income tax and national insurance from employees. Not all payrolls will require PAYE, there is an income threshold and other criteria which determine the requirement.

With PAYE a business has a responsibility for reporting employees payment and deductions prior to payment (known as Real Time Information), that could be up to 76 declarations for those businesses running weekly and monthly payroll!  One of the responsibilities you have is to inform HMRC regarding joiners and leavers on your PAYE payroll.

An employer is also obliged to make tax payments based on the salaries that they pay to their employees. Together with PAYE this forms payroll tax. A business has to factor this into the cost of hiring employees.

Payroll Administration and General Bookkeeping

There are a number of common mistakes that small businesses make with PAYE in running their payroll that we have identified:

  • Missing the HMRC deadlines
  • Not keeping your Payroll for at least 3 years (you can’t just run it and delete it)
  • Not having a good enough backup and recovery of your payroll data (this is a fundamental question you need to ask of any outsource service too)
  • Dealing with payments such as statutory sick pay and statutory maternity pay incorrectly
  • Not doing the payroll regularly
  • Using wrong tax codes
  • End of year submission errors

It should be noted that HMRC enforce penalties with regards to payroll tax and not just for late payments.

And whilst payroll and payroll tax in particular might not seem a value add activity in your business– if you make a mistake that impacts an employee pay packet – it can adversely affect staff motivation.

It’s important for a business owner to recognise that payroll requires a specialist knowledge.

HMRC do provide some tools to help businesses get started with PAYE and payroll. The latest information is on the government website.

Efficiency and the bottom line

All businesses are mindful of increasing their operational costs, that’s especially true for micro businesses, where the business owner and their team can often have diverse aspects to their jobs in order to keep the business in good operational order. Effective business administration and general bookkeeping is always an important factor in business success.

When considering the bottom line and the cost challenge, there is an exercise that we recommend business owners to complete:

Identify your strengths in terms of your business, make a list of what you do really well – and ultimately leads directly or indirectly to revenue generation for your business.  Then, calculate how much time you spend on your business administration at the moment.

Using your hourly rate, it is possible to work out the lost opportunity (thus potential revenue) cost of spending time on performing tasks such as running your payroll. This exercise is often an eye opener for small business owners.

Generally, when we work on tasks that are not our natural strengths it often takes up much longer to complete said tasks. Most small businesses can expect to spend up to several hours a month managing their payroll.

A further thing to consider is the duplication, or more aptly the lack of duplicated skills in a small business. Many can ill afford to maintain their staff’s key skills, let alone cross train them in different disciplines. Any business owner will need to have a strategy for the payroll administrator’s holiday time and unplanned downtime such as sickness in terms of cover – especially if they are the one performing the function.

Choosing your payroll partner

Here’s what we recommend you look for with a payroll partner

  • Gain peace of mind. Any reduction of risk strategy must ensure your payroll partner of choice has the right processing mechanisms in place.
  • Affordability will usually come into the equation. Ensure there are no hidden costs such as an additional year end processing charge.
  • Regular communication is essential. Agree up front how and what form that will take.
  • Some payroll partners offer value add services, such as monthly management information, full tax and business growth planning which when purchased together can be more cost effective.

Making Tax Digital (MTD) will eventually mean that all businesses will need to submit electronic records regularly to HMRC, and not just the payroll. By starting with the end in mind and making the shift to regular shorter cycles, such as monthly, sooner rather than later, businesses will undergo a much smoother transition when MTD is fully implemented.

SF Chartered Certified Accountants provide a full business and personal tax planning service including payroll tax and payroll management. CONTACT US for a free confidential, no obligation consultation

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