1 Principles of payroll this chapter covers... In this chapter we introduce the role of payroll administrator and the demands of the job. The role requires a knowledge of government legislation that sets out how payroll is processed: n n employers must process their payroll on computer and submit information online to HMRC on or before each pay day employers need to keep certain information about their employees We also look at procedures and practices within the payroll department including: n n n procedures for ensuring that changes to payroll records are properly authorised the difference between positive and negative payrolls and how the payroll administrator deals with them the importance of keeping payroll data secure and confidential including the relevance of the Data Protection Act principles of payroll 3 I N T R O D U C T I O N TO PAY R O L L The business of employing people in the UK is regulated by government legislation designed to protect workers. Employees are entitled to receive regular financial reward for their work. The amount is specified in their contract of employment. The government department that is in charge of collection of taxes is Her Majesty’s Revenue and Customs (HMRC). The job of paying staff is handled by the payroll department of an organisation and you, as a payroll administrator, need a range of skills and knowledge in order to do the job. You must be aware of the need to get things done on time and to do them correctly and accurately. n n n Employees are entitled to receive their pay on or before the due date. You must always meet the deadline. Failure to pay staff on time could cause financial difficulties for the employee, undermine their confidence in their employer and thus demoralise and demotivate them. There are also deadlines for making payments to HMRC, pension providers, the courts and other external bodies. Failure to pay these on time could result in financial penalties and interest charges. Any variations or changes to payroll must be dealt with promptly. Failure to make necessary changes may result in incorrect payments being made to the detriment of the employee and the employer. HMRC People working in payroll will be in touch with HMRC regularly, both for advice on keeping up-to-date with changes in practice and legislation, and because there are a number of legal obligations that employers have to meet when employing and paying staff. computerised payroll and RTI In 2013 almost all employers (with very few exceptions) were required by law to start running their payrolls on computer. Many, of course, were already doing this. The reason it is mandatory (compulsory) is so that employers can transmit up-to-date information to HMRC online on every pay day about what they have paid their employees and who their employees are. Previously, contact with HMRC was by post. The online process is called RTI or Real Time Information. 4 introduction to payroll systems The choices available to employers (depending on their size) are: n n n purchase from a range of commercial payroll software and employ or train someone to be able to use it download free Basic Tools from HMRC. This is a payroll software program suitable for organisations with fewer than 10 employees farm out the payroll function to a commercial payroll bureau such as an accountancy practice. The accountant then uses commercial software to process payroll and liaise online with HMRC on behalf of the client This text explains the basic principles and processes of paying employees. Knowledge of how and why things happen helps a payroll administrator to understand what the computer program is doing. E M P L O Y E E R E C O R D S – I N F O R M AT I O N As a legal minimum you must record the following information for each employee: n full name (including a middle name if there is one) n date of birth n n n n gender (male or female) full address National Insurance number the date the employment started In practice you will probably keep other information in the employee record too, eg employee number, home telephone or mobile number. A U T H O R I S AT I O N There will be a recognised procedure for inputting and alteration of employees’ details. This will depend on the size and structure of the organisation. Here are some examples of changes to employee records that will require authorisation: n changes to pay rates or status (eg through promotion) n change of pay frequency n changes to hours worked principles of payroll n n 5 changes to employees’ personal details (eg marital status, home address, bank details) voluntary deductions to be added (eg pension contributions, charitable donations) Before the payroll administrator processes a payroll, the values for each employee must be checked and, where necessary, authorised by signature. In a small business this may be the signature of just one person, eg the payroll or finance manager, but in a large business there may be departmental managers who sign to authorise payments for staff in their work area. For example, if the payroll administrator is processing the pay of several warehouse employees by inputting their hours from timesheets, the timesheets will be signed by the warehouse manager. In a large organisation, specimen signatures will be available to the payroll administrator to ensure that signed documents are authentic. A list of authorised signatories (eg departmental heads) will be held and kept up-todate in the payroll office. Information Here are some examples of changes to payroll details together with likely signatories and sources of information. A range of different organisations is covered. Authorising signatory (likely) Source of information Change of pay frequency from weekly to monthly pay. Managing Director or Finance Director Official internal document Expenses claimed by member of teaching staff in a school. Department Head Pay increase of 2.5% for all staff. Managing Director or Finance Director Completed timesheets of warehouse assistants. Quarterly commission payment for sales staff. Piece rate payment for number of units produced. Warehouse Manager Sales Director Production Manager Overtime payments for shop staff. Shop Manager Distribution of restaurant tips to waiting and kitchen staff. Restaurant Manager Deduction of donation to Oxfam from Gary Downing’s pay. Gary Downing Promotion of admin assistant Office Manager grade to admin supervisor grade. Change of Jan Roman’s home address. Jan works as a factory supervisor. Jan Roman Official internal document Timesheets Expenses claim document Sales records Production records Timesheets Written record of tips received Official internal document Note or letter from Gary Downing Note or letter from Jan Roman 6 introduction to payroll systems N E G AT I V E A N D P O S I T I V E PAY R O L L S Information about the level of pay and how it is calculated is given in an employee’s contract of employment. The amount paid to each employee depends on a number of factors. In many cases, employees receive a fixed salary or wage for the period they agree to work, so the amount of pay they receive each pay day is the same. For example, an employee may be paid a salary of £24,000 per year. This would result in monthly pay of £2,000 (£24,000 divided by 12). Or an employee may have an agreed wage of £300 per week. These types of payment are known as ‘negative payroll’ because there is no need for the payroll administrator to input any information in order for the employee to be paid. Note that ‘per year’ is often written as ‘per annum’ or abbreviated to just ‘pa’. In other cases pay is dependent on variables such as the number of hours worked or whether there is extra pay for overtime. These values have to be input in order for the employee to receive the correct pay (or sometimes any pay at all), so this is referred to as ‘positive payroll’. Variables include: n n n n n pay for basic hours worked pay for overtime hours worked bonus pay (extra pay) commission (performance-related pay) piece rate pay (pay for each item produced) For example, an employee’s timesheet may show basic hours of 40 and overtime hours of 5 during a week. These figures would be input so that the employee’s pay for the week could be calculated. Where statutory payments such as Sick Pay or Maternity Pay are made or included, positive input will be necessary. Chapter 3 has more details about these types of payment. Some employees may receive a combination of negative and positive payroll. For instance, a sales person might have monthly pay (negative) of £1,500 plus a commission payment (positive) of £250. principles of payroll Case Study 7 Haulit is a distribution company operating a fleet of lorries across the country. It employs 25 members of staff and pays them monthly. The payroll manager has to deal with a mixture of positive and negative payrolls as follows: Job role Pay details Positive or negative? Transport Director Salary £36,000 per annum Negative Salary £15,000 per annum Negative Hourly basic rate + overtime Positive Managing Director Office Manager Salary £42,000 per annum Negative How does it work? Pay is £3,500 each month (42,000 divided by 12) Pay is £3,000 each month Salary £24,000 per annum Negative Hourly basic rate + overtime Positive Salary £25,000 pa + occasional night shift allowance Salary negative Shift allowance positive Sales representatives £20,000 pa + performance-related pay (commission) Accounts and payroll Manager £25,200 per annum Salary negative Performance-related pay (commission) positive Pay is a combination of salary (negative) and input of commission (positive) Positive Warehouse assistant Summer bonus for all staff £18,000 per annum. Statutory Sick Pay payable for 9 days of the month. Positive Payment depends on input of bonus Admin assistant on maternity leave Statutory Maternity Pay Positive Admin assistants Long distance drivers Local drivers Warehouse Manager All employees Negative Pay is £2,000 each month Pay is £1,250 each month Pay depends on input of basic and overtime hours Pay depends on input of basic and overtime hours Pay is a combination of salary (negative) and input of shift allowance (positive) Pay is £2,100 each month SSP is paid for 9 days and normal pay is adjusted for the remainder of the pay period SMP is paid for the first 39 weeks of maternity leave in place of normal pay 8 introduction to payroll systems C O N F I D E N T I A L I T Y A N D S E C U R I T Y O F I N F O R M AT I O N As for any other financial information in business, you must be aware of the requirements of the Data Protection Act and the need for security and confidentiality of data at all times. This is particularly relevant to employee payroll records. The Data Protection Act The act contains eight ‘Data Protection Principles’. These specify that personal data must be: 1. Used fairly and lawfully. 2. Used for limited, specifically-stated purposes. 3. Used in a way that is adequate, relevant and not excessive. 4. Accurate. 5. Kept for no longer than is absolutely necessary. 6. Handled according to people’s data protection rights. 7. Kept safe and secure. 8. Not transferred outside the UK without adequate protection. confidentiality Confidentiality means not allowing information to be seen by or passed to anyone who is not authorised to see it. This includes other members of staff as well as outside organisations. As payroll administrator you are entrusted with private and sensitive information about employees: their personal details (eg age, address, bank details) and their pay information (eg pay rates, tax status). It is one of the responsibilities of the job to look after it and to know when to disclose (reveal) it and when not to disclose it. when can information be disclosed? n to HMRC n if an employee authorises disclosure in writing n when the law requires it (eg the police or courts) record-keeping In order to maintain confidentiality of payroll data, systems for storing information must be secure. These include: n n the use of passwords for opening computer software programs not leaving computer programs open when you leave your desk principles of payroll n n 9 the use of lockable cabinets for storing paper records locking the office where payroll records are kept and restricting entry only to authorised staff (where possible) Employee records fall into two categories: n n permanent records which are those that do not change from year to year, or pay period to pay period. These include employee name, address, date of birth, and bank details current records which are those that belong to the current tax year. These include pay and deductions for the current year to date The system for filing records may vary in different organisations but it will often be based on an alphabetic or numerical system, eg by employee last name or by employee number where numbers are used. document retention The government requires that employee records are kept for a minimum of three years from the end of the current tax year, but many employers keep them for six years from the end of the current tax year. A six-year retention period is in line with the legal requirement for the retention of other accounting records. The need for tight security and confidentiality of payroll information cannot be overstated. Fraud is a very real possibility and systems must be in place to prevent it. For example, poor attention to security has been known to facilitate the setting up of fictitious employees and the directing of company money into their bank accounts. 10 introduction to payroll systems Chapter Summary n n n n n n n n n n n The job of payroll administrator requires the skills of accuracy and timeliness. The government department that deals with taxation is Her Majesty's Revenue and Customs (HMRC). Organisations that pay employees must process their payroll on computers that are capable of transmitting payroll information to HMRC's computers online. HMRC specifies what minimum information should be kept about employees. Procedures should be in place to ensure that payroll information is properly authorised by signature of the appropriate manager. Payment of employees is dependent on whether the payroll is negative or positive. Negative payroll assumes that the rate of salary or wages is the same on each pay day and is pre-entered into the payroll system. Positive payroll depends on the input of variable information such as hours, pay rates or lump sums. Payroll information is vulnerable to fraud and unauthorised transfer of personal data. Systems must ensure that information is kept securely and not disclosed to unauthorised parties without written permission of the employee. Employee and payroll records must be kept for a minimum of three years from the end of the current tax year. principles of payroll Key Terms HMRC RTI negative payroll positive payroll basic pay overtime pay bonus commission piece rate Data Protection Act fraud 11 Her Majesty's Revenue and Customs – the government department in charge of collecting taxes Real Time Information – the process of updating HMRC online using computerised payroll software on each pay day payroll data that repeats each pay day and does not require additional input from the payroll administrator payroll data that requires active input by the payroll administrator for an employee to be paid an agreed rate of pay, specified in an employee's contract of employment, for an agreed minimum period of time pay for hours that are additional to hours at basic pay, usually paid at a higher rate a payment added to normal pay, usually as a reward for good results or a significant event performance-related pay or pay that is determined by reference to another figure, eg sales revenue pay for the number of units produced an Act of Parliament passed in 1998 which controls the keeping and processing of personal data about individuals criminal deception intended to result in financial or personal gain 12 introduction to payroll systems Activities 1.1 RTI stands for: (a) (b) (c) (d) Recording Timed Information. Real Time Information. Reporting Timely Information. Real Term Information. Choose the correct answer. 1.2 Which two of the following are not required by law to be kept in an employee's record? (a) (b) (c) (d) (e) (f) (g) (h) 1.3 Full name. Gender. Date of birth. Full address. Next of kin. National Insurance number. Employment start date. Previous employer. Joe works in a supermarket. He is assigned to work in the fresh produce department. His hours are variable and are recorded on a timesheet. From the following list of options, who do you think is the most likely person to be the authorising signatory on Joe's timesheet before it can be submitted for payroll processing? (a) (b) (c) (d) Joe’s colleague, Jacob, who does a similar job but has worked at the supermarket for longer than Joe. The manager of the fresh produce department. The supermarket manager. Joe himself. principles of payroll 1.4 13 State whether each of the following represents negative payroll, positive payroll or a mixture of both. Enter the letters N, P or M as appropriate in the box. (a) Ian is a teacher who is paid £25.00 per hour for contact time with students. His hours are variable and he has to put in a written claim for his pay on a monthly basis. N, P or M (b) Craig works for an IT company. He is a programming expert and he is paid £500 per week. (c) Haleemah is paid fortnightly for a combination of basic and overtime hours in a factory. A timesheet for her total hours is signed and submitted to the payroll department. (d) Ness is paid an agreed salary of £20,000 per annum. She is paid monthly. (e) (f) 1.5 Freya sells advertising and earns a basic monthly salary of £1,500. She also receives variable commission based on total advertising revenue for the month. Duncan is paid £400 per week. He is off sick for all five days that he would normally work. Indicate whether the following statements are true or false. Enter the letters T or F as appropriate in the box. (a) The Data Protection Act only applies to organisations with more than 10 employees. (c) Payroll records must be retained for at least three years from the end of the current tax year. (e) One of the eight Data Protection principles is that personal data must not be used in a country outside the UK unless that country has similar data protection legislation. (b) The names and addresses of staff can be shared with other businesses. (d) Fraud is when someone pretends to be someone else. (f) Information about employees' pay can be disclosed to HMRC. True/False