Jargon Buster – PAYE Payroll Terms
Receiving a payslip at the end of a week or month is the normal practice for the majority of the UK workforce. However, unless you work within the payroll department of a company, some of the wording used and processes followed can appear very alien yet it is important to try and have some understanding of what they mean.
Below are a list of terms that are used within PAYE Payroll and a brief explanation of what they mean:-
- Auto Enrolment
Auto Enrolment is the term used to describe the scheme set up to manage the pension deductions made by employers from employees’ wages. All employees are automatically enrolled onto the company pension scheme (if they are eligible) unless they opt-out personally. The deductions are taken from the payroll and the contributions are made by the employee and the employer.
- Direct Earning Attachments/Deduction of Earnings Order/Attachment of Earning Order
These type of deductions are where a creditor or government department has instructed your employer to make a deduction from your earnings relating to an unpaid debt. This may be relating to debts such as child maintenance, council tax arrears or where a creditor applies through a court to recoup these funds from you directly.
FPS stands for ‘Full Payment Submission’ which is where the payroll department will send a file to HMRC on or before the day the employees are paid to notify HMRC of the net payment made and the statutory deductions taken.
- Gross Pay
Gross Pay is the amount earned before any deductions are made from the payroll. For example, a salary of £24k per annum would yield a gross pay of £2,000.00 per month, but this is not what your final pay would be.
- Income Tax
Income tax is tax paid based on your income. The rate of tax on your income is calculated based on the amount of income earnt over the year. The tax deducted is affected by the tax code given by the tax office, which is based on your financial situation and history.
- National Insurance
National Insurance are contributions based on how much income you earn and allow you to build up entitlement to certain statement benefits. National insurance is payable by employees and employers at varying rates depending on how much income is earned during the pay period. Employees stop paying National Insurance on income once they reach 60 years old.
- Net Pay
Net Pay is the amount earned after all statutory deductions are made from the payroll and would be the amount actually paid to the employee.
A P11D is a tax form filed by employers for each Director and employee earning over £8,500 per year which reports to HMRC any benefits and expenses that have been paid to an employee that are not through the payroll. These benefits may include company cars, gym memberships, mobile phones, private healthcare, etc. and a copy of this is provided to the employee should they need to complete a self-assessment tax return.
A P45 form is given to employees when they leave an employment and it details information such as the salary paid to date, the tax deducted to date and details of the last tax code used. The information is uploaded to HMRC when the employer runs the FPS transmission and the employee will give a copy of the P45 to their new employer when they begin their next position.
A P60 is a certificate given at the end of the tax year detailing the salary earned and all of the deductions for tax and national insurance made from their current employer (and their previous employer if they have submitted a P45). This is an important certificate as it is proof of the taxes paid and the income earned.
PAYE stands for Pay-As-You-Earn and is the method used by employers of deducting income tax and national insurance on wages before paying the employee.
RTI stands for Real Time Information and is the term used to describe the way that HMRC collect the PAYE information in real time i.e. as the payroll is run instead of at the end of the tax year. The RTI information is sent to HMRC via the FPS through the payroll software.
- Starter Checklist
The Starter Checklist is the form that replaced the P46 and is filled out by new employees when they start a new job if they do not have a P45 from their last employer. This form provides all of the candidate’s information to the new employer and allows the allocation of a temporary tax code until HMRC notify they payroll department.
- Statutory Maternity/Paternity/Adoption Pay
Statutory Maternity Pay (SMP), Ordinary Statutory Paternity Pay (OSPP) and Statutory Adoption Pay (SAP) are all types of payments given to employees should a parent take time off to look after a new baby. Mothers are often provided with payments for 39 weeks and father are entitled to 2 weeks payments. There is also the possibility of the father taking some of the mother’s maternity leave under ASPP.
- Statutory Sick Pay
Statutory Sick Pay (SSP) is when an employee is off sick from work for 4 or more days in a row and are entitled to be paid outside of the company sick pay scheme.
- Student Loan Repayments
Student Loan Repayments are made when an employee has an outstanding student loan that is paid via the payroll. There are certain weekly/monthly thresholds that must be met before these deductions are made.
- Tax Codes
Tax Codes are a code number which represent the tax-free part of an employee’s income which is assigned by HMRC and are used to work out how much income tax to take from your pay. These codes take into account the annual tax-free allowance along with any unpaid tax or the tax on benefits you are receiving (shown on your P11D). These codes also include letters which also dictate the tax rate you pay may be calculated on (such as BR, DO and NT).
- Week 1/Month 1 Tax Code
If your tax code is followed by “W1” or “M1” then this means that your tax will be calculated on a Week 1/Month 1 basis under emergency tax. This means that any tax allowances will be restricted to that individual week/month and will not take into account previous allowances you may have remaining.
TBOS runs the payroll processes for nearly all of the recruitment agencies we manage on a daily basis, whether that is the monthly internal staff payroll including commission calculations, staff expenses and benefits or if it is processing the PAYE temporary and contractor workers payroll. TBOS’s internal staff are trained and experienced to cope with various size payrolls and can ensure that the staff and candidates are processed correctly using industry known software.
For more information on how TBOS can manage the full back office and accountancy of your recruitment agency, including staff and candidate PAYE payroll, please contact our office.