For anyone involved in managing payroll, ensuring tax compliance can be a daunting task. Making mistakes when it comes to these taxes can result in costly penalties and legal complications.

We've put together a 7-steps guide, to help you avoid these pitfalls and ensure you are asking yourself the right questions, when it comes to being tax compliant.

1- Understanding Payroll Taxes

Payroll taxes are taxes that are deducted from employees' pay and paid to HM Revenue and Customs (HMRC). Payroll taxes in the UK include:

• Income tax: This is the tax on the money employees earn from their jobs. Employers are responsible for deducting income tax from employees' paychecks and paying it to HMRC.
• National Insurance contributions: This is the tax on earnings that funds the UK's social security system. Employers are responsible for deducting National Insurance contributions from employees' paychecks and paying them to HMRC. Employers also pay Employer National Insurance contributions.
• Student loan repayments: Employees who have taken out student loans must repay them through their paychecks once they earn above a certain threshold.
• Workplace pensions: Employers must automatically enroll eligible employees into a workplace pension scheme and make contributions on their behalf.

2- Registering for Payroll Taxes

If you're a new employer, you'll need to register with HMRC for payroll taxes before your first payday. You can do this online using the HMRC website.

During the registration process, you'll need to provide information about your business, such as your name and address, as well as information about your employees. Make sure you also choose a payroll software to help you manage your payroll (we can help!).

3- Calculating Payroll Taxes

Calculating payroll taxes can be complex, but it's essential to get it right to avoid penalties and legal complications. To calculate payroll taxes correctly, you'll need to:

• Determine each employee's tax code: This is a code that HMRC assigns to each employee based on their earnings and personal circumstances. The tax code determines how much income tax should be deducted from the employee's pay.
• Calculate National Insurance contributions: The amount of National Insurance contributions that need to be deducted from an employee's pay depends on their earnings and National Insurance category letter.
• Deduct other payments: This includes student loan repayments and workplace pension contributions.

To ensure accurate calculations, consider using payroll software that automates the process and reduces the risk of errors.

4- Reporting Payroll Taxes

Employers must report payroll taxes to HMRC each payday. This is done using a Full Payment Submission (FPS), which provides details of the employees' pay, tax, and National Insurance contributions. Employers must also submit an Employer Payment Summary (EPS) to HMRC to claim any reduction in the amount of PAYE owed to HMRC.

Employers must submit their FPS and EPS on or before each payday. Late submissions can result in penalties and interest charges.

5- Keeping Accurate Records

Keeping accurate records is essential for payroll tax compliance in the UK. Employers must keep records of their employees' pay and deductions, as well as their own National Insurance contributions and payments to HMRC.

Records must be kept for at least 3 years after the end of the tax year they relate to. In the event of an HMRC investigation, employers may be required to produce these records.

6- Staying Up-to-Date with Tax Law Changes

Tax laws and regulations change frequently in the UK, and it's essential to stay up-to-date to avoid penalties and legal complications. For example, in 2021, the UK government introduced changes to the furlough scheme, which included updates to the way employers calculate their employees' pay for furlough.

To stay up-to-date with tax law changes, employers should regularly check HMRC's website for updates or subscribe to their email updates. Employers should also consult with a tax professional if they have any questions or concerns.

7- Avoiding Common Payroll Tax Mistakes

Avoiding common payroll tax mistakes is essential for payroll tax compliance in the UK.

To avoid these mistakes, employers should understand the UK tax system, stay up-to-date with tax law changes, use payroll software to automate calculations and submissions, and consult with a tax professional if they have any questions or concerns.

In conclusion

Payroll tax compliance is essential for business owners in the UK. By understanding payroll taxes, registering for payroll taxes, calculating payroll taxes accurately, reporting payroll taxes, keeping accurate records, staying up-to-date with tax law changes, and avoiding common payroll tax mistakes, employers can ensure compliance and avoid penalties and legal complications.

Consider using payroll software such as Pento to streamline the process and reduce the risk of errors while saving time and money.

And to wrap it up, remember that you can stay on top of the latest payroll and HR trends and tips by subscribing to our newsletter below. You'll receive payroll guides and access to webinars on trending People and Finance topics.

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