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Auto Enrolment Explained - Part 2 of our Guide to Payroll

Posted by Ludovica Zallot on Sep 8, 2016 5:00:00 PM

employees image by Diana Varisova
In the first part of this guide we introduced payroll and gave a basic overview of the tasks it involves. In this post we will discuss specific areas - such as the tricky subject of Auto Enrolment.

Payroll is a term commonly used to describe the set of rules, requirements and practices related to paying an employee - from issuing payslips, keeping records and deducting the right amount of tax from a salary. Some prefer to outsource payroll completely, to avoid having to worry about this side of the business, but for those who decide to do it in house, here is a more in-depth explanation of some of its areas - in the second part of our payroll guide for SME's.
Automatic Enrolment

By 2018, all employers will have to provide a workplace pension scheme for employees who qualify. By now you probably have heard of "auto enrolment" and might already know your staging date, or the date by which you will need to enrol your staff into a pension scheme. If you do not know your staging date yet, head over to to enter your PAYE reference and find out.
Any person aged between 22 and the state pension age, who earns a minimum of £10,000 a year and works within the UK is eligible to be enrolled into a pension scheme. In order to set up a pension scheme, if you do not already have one in place, you can follow this official guide from the Pension Regulator. The amount you will have to pay into the employee's pension pot is equivalent to 1% of their "qualifying earnings", or the full amount they earn before tax - so the toal miniminum contribution will be 2%, 1% from the employer and 1% from the employee. These percentages will increase in the following years.
As part of the auto enrolment process, you are legally required to provide a Declaration of Compliance, to confirm you are meeting your duties - you can find the form here. If one of your employees wishes to opt out of auto enrolment, then he or she is required to hand in an opt-out notice, usually obtained from the pension scheme directly.
Keeping Records

An essential part of running your own payroll, is to keep detailed records. These need to be accurate and you must keep them for at least 3 years from the end of the tax year they refer to - if your records are not found to be full, HRMC could fine you up to £3,000. However, if they are lost, stolen or have been destroyed, HRMC can accept estimated figures. 
The records need to include what you pay each employee, any deductions you make, and any money paid while the employee was on leave. You also need to keep a record of tax code notices and taxable expenses or benefits.
Keepers payroll giude for SME's
Expenses and Benefits
Your records will also need to include the date and details of every employee'sexpenses and benefits, as well as any payment your employee made towards them. Expenses and benefits are, for example, company cars, health insurance, travel expenses and childcare. All these need to be reported to HMRC with a P11D form. HMRC provides a comprehensive list of what expenses/benefits need to be reported, and how they are calculated - you can find it here
Tax codes

These are the codes you must input into your payroll software to see how much you need to deduct from each employee's wages. A tax code is made up of a number which represents the tax-free income they are entitled to, and a letter, which is assigned depending on the employee situation and affects that tax-free amount. For example, an employee with tax code 1100L can earn £11,000 tax free, and the letter L means he/she is entitled to the standard allowance depending the income earned. 

The tax code of a new employees can be worked out from their P45, but if this is not available, they will need to fill in a PAYE Starter Checklist and you will need towork out their tax code from the given details. The tax code needs to be updated at the start of each tax year - HMRC will issue a notice if there are any changes to your employee's tax-free income, in which case you must update your payroll software with the new tax code.
In conclusion, the second part of this guide has covered in more depth some aspects of payroll, such as expenses and benefits as well as tax codes and what records must be kept. Auto enrolment is another important subject - and if you have just started employing staff, make sure that you are fully compliant with the legislation regarding workplace pensions.
Payroll is a term commonly used to describe the set of rules, requirements and practices related to paying an employee - from issuing payslips, keeping records and deducting the right amount of tax from a salary.

If you have any questions about this issue, do not hesitate to seek professional help, or if you are with Keepers, talk to us now. On top of offering some of the best accountancy services in Sussex, we also give free business advice and free tips for small businesses. Book your Free Telephone Conversation with us now. Keepers, the proactive Sussex accountant.

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Topics: business tips, What is PAYE, Payroll, start up advice