Payroll management with confidence
Expert advice on employee tax deductions in payroll
The accurate payment of employees presents a variety of challenges for employers. At the forefront of this is payroll, as studies show that over 50% of jobseekers state factors surrounding pay as their reason for seeking out new roles.
The responsibility of employee tax deductions falls on you, as do, by default, any tax deduction errors. Therefore, accurate and efficient payroll management is of all-time importance for businesses throughout the UK.
As a trusted provider of tax payroll management and reporting, we understand the financial and time burden that completing monthly payroll can place companies under. Here, we demystify tax deductions in payroll, so you can streamline your payroll processes.
What are deductions from an employee’s pay?
Employee tax deductions are controlled monetary subtractions from the wage or salary of an employee that are collected by the UK government for redistribution.
Firstly, statutory deductions are required by UK law to be paid. This includes income tax, which is a tax that procedurally becomes larger based upon how much an employee earns and is used to fund things such as government spending. If applicable to the employee, student loans also fall into this category, which are regular deductions made to pay back an employees' student debt.
Voluntary deductions are an employee chosen deduction made on pay, often taking the form of health insurance, charity deductions or additional pension contributions.
Involuntary tax deductions are obligatory payments made by an employee from their pay, including child support payments and bankruptcy order payments.
Finally, contractual deductions are deductions from employee pay that are contractually written agreements, most commonly between employer and employee. They include payments for uniform, private healthcare services and insurance.
Understanding tax deductions in payroll
Tax deductions payroll can be complex, as various deductions are taken for various purposes. By definition, they are deductions from employee pay taken to fund various other areas, such as national government spending or to pay off student loans, and are calculated based upon employee earnings.
Income tax
Income tax is an employee tax deduction that is calculated on a yearly basis and is used to fund public spending. It is calculated by a band system, which are as follows:
The lowest band is called personal income, which sits at £12,750 per tax year and below, anything earned below this threshold is not taxed.
The basic rate is between £12,751 and £50,270, where 20% of income is taken as income tax.
The higher rate is between £50,271 to £125,140, where 40% of income is taken as income tax.
The additional rate is above £125,140, where 45% of income is taken as income tax.
National insurance
National insurance is an employee tax deduction taken to pay towards the state pension. National Insurance deductions are calculated by placing an employee’s monthly earnings in the correct National Insurance threshold. The thresholds are as follows:
The Lower Earnings Limit is the maximum an employee can earn in a month before paying National Insurance, sitting at £542. Those who earn below this don’t pay National Insurance but do receive the benefits.
The Primary Threshold is £1048 a month and above, at which point employees are deducted 8% from their pay for National Insurance.
The Upper Earnings Limit is £4,189 a month and above, at which point employees pay 2% of their pay as National Insurance.
Income tax codes
Income tax codes are made up of numbers and letters. They are designed to tell employers and pension providers how much tax-free income an employee receives in the relevant tax year.
The most common tax code is 1257L, which is used for the majority of people with one job or pension.
The correct calculation of employee tax codes is integral to the payroll process, as faults within tax codes can lead to mistakes with the amount of tax an employee pays.
Employer responsibilities for employee tax deductions
The management of payroll can be a convoluted process, due to the various intricacies associated with employee tax deductions and HMRC. In order for employers to successfully manage their payroll in-house, they must abide by HMRC rules and regulations, whilst also ensuring that any payments and deductions are calculated and paid on time.
This can be a time-consuming and costly process, due to the hours required to complete payroll and the potential penalties incurred from inaccuracies during the process.
In order to maintain employee morale and satisfaction, employers must show the following qualities and skills:
Compliance
HMRC have a rigorous framework of guidelines that are established to ensure that employers and employees alike are paying the correct amount of tax. In regards to responsibility to comply with these guidelines, employers bare the majority of responsibility to see that these guidelines are followed, with potential financial repercussions being incurred if they fail to do so.
Deducting and reporting taxes
Employees are required at the least to pay statutory taxes such as National Insurance and Income Tax. This means employers must conduct accurate deductions from employee pay to fulfill these dedudctions, most commonly through PAYE and on a monthly basis. Moreover, employers must also report these employee tax deductions accurately to employees and HMRC.
Clear communication
Employee tax deductions are a crucial area of payroll, due to the importance for employees of correct pay. In order to achieve correct pay, employers must maintain strong lines of communication with employees and HMRC concurrently.
Accurate record keeping
Having completed employee tax deductions, employers are obligated to maintain accurate records of the process, in order to report to HMRC and to employees accurately, whilst ensuring that they have complied with HMRC guidelines.
How Payroll Solution Services can help
Payroll Solutions Services use years of expertise to provide an all-encompassing payroll management solution that outsources your payroll workload. By working in partnership with you, we ensure all aspects of your payroll, including tax deductions payroll, are calculated accurately and efficiently, enabling you to prioritise your business.
At Payroll Solutions Services, we understand that completing in-house payroll is a highly time consuming and costly process. Outsourcing your payroll to us not only saves these resources, but provides you with a reliable and accurate monthly payroll service that empowers you to grow your business effectively.
Scalable payroll solutions for every business type
Payroll Solutions Services provide three straightforward payroll packages. Designed with your company growth as the focal point, our payroll management packages take the strain of payroll off your workload.
Fully Managed Large Enterprise Payroll
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Comprehensive payroll management
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Tax filing and compliance
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Direct deposit and payment options
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Year-end reporting
Payroll Bureau Services
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Efficient payroll processing
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Flexible service options
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Data integration
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Support and training
Construction Industry Scheme
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Specialised payroll services
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CIS deductions and reporting
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Verification and validation
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Detailed statements
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Let us take care of your employee tax deductions. Contact us today and tell us about your business.