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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:
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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:
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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
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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.
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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.
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introduction to payroll systems
The choices available to employers (depending on their size) are:
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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:
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full name (including a middle name if there is one)
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date of birth
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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:
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changes to pay rates or status (eg through promotion)
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change of pay frequency
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changes to hours worked
principles of payroll
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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
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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:
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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
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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?
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to HMRC
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if an employee authorises disclosure in writing
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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:
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the use of passwords for opening computer software programs
not leaving computer programs open when you leave your desk
principles of payroll
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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:
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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.
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introduction to payroll systems
Chapter
Summary
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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
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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
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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
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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