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 employers must process their payroll on computer and submit information online
to HMRC on or before each pay day

n employers need to keep certain information about their employees

We also look at procedures and practices within the payroll department including:

n procedures for ensuring that changes to payroll records are properly authorised

n the difference between positive and negative payrolls and how the payroll
administrator deals with them

n 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 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.
n 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.
n 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 purchase from a range of commercial payroll software and employ or
train someone to be able to use it
n download free Basic Tools from HMRC. This is a payroll software
program suitable for organisations with fewer than 10 employees
n 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 gender (male or female)
n date of birth
n full address
n National Insurance number
n 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 changes to hours worked
n change of pay frequency
 principles of payroll 5

n changes to employees’ personal details (eg marital status, home

address, bank details)
n 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-to-
date in the payroll office.
Here are some examples of changes to payroll details together with likely
signatories and sources of information. A range of different organisations is
covered.
Information Authorising signatory (likely) Source of information
Pay increase of 2.5% for all staff. Managing Director or Finance Official internal document
Director
Change of pay frequency from Managing Director or Finance Official internal document
weekly to monthly pay. Director
Completed timesheets of Warehouse Manager Timesheets
warehouse assistants.
Expenses claimed by member of Department Head Expenses claim document
teaching staff in a school.
Quarterly commission payment Sales Director Sales records
for sales staff.
Piece rate payment for number Production Manager Production records
of units produced.
Overtime payments for shop staff. Shop Manager Timesheets

Distribution of restaurant tips to Restaurant Manager Written record of tips received

waiting and kitchen staff.
Promotion of admin assistant Office Manager Official internal document
grade to admin supervisor grade.
Deduction of donation to Oxfam Gary Downing Note or letter from Gary Downing
from Gary Downing’s pay.
Change of Jan Roman’s home Jan Roman Note or letter from Jan Roman
address. Jan works as a factory
supervisor.
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 pay for basic hours worked
n pay for overtime hours worked
n bonus pay (extra pay)
n commission (performance-related pay)
n 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 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
Case
with a mixture of positive and negative payrolls as follows:
Study

Job role Pay details Positive or negative? How does it work?

Managing Director Salary £42,000 Negative Pay is £3,500 each

per annum month (42,000 divided
by 12)

Transport Director Salary £36,000 Negative Pay is £3,000 each

per annum month

Office Manager Salary £24,000 Negative Pay is £2,000 each

per annum month

Admin assistants Salary £15,000 Negative Pay is £1,250 each

per annum month

Long distance drivers Hourly basic rate Positive Pay depends on input of
+ overtime basic and overtime
hours

Local drivers Hourly basic rate Positive Pay depends on input of

+ overtime basic and overtime
hours

Warehouse Manager Salary £25,000 pa Salary negative Pay is a combination of

+ occasional night Shift allowance positive salary (negative) and
shift allowance input of shift allowance
(positive)

Sales representatives £20,000 pa Salary negative Pay is a combination of

+ performance-related Performance-related salary (negative) and
pay (commission) pay (commission) input of commission
positive (positive)

Accounts and payroll £25,200 per annum Negative Pay is £2,100 each
Manager month

All employees Summer bonus for all Positive Payment depends on

staff input of bonus

Warehouse assistant £18,000 per annum. Positive SSP is paid for 9 days
Statutory Sick Pay and normal pay is
payable for 9 days of adjusted for the
the month. remainder of the pay
period

Admin assistant on Statutory Maternity Pay Positive SMP is paid for the first
maternity leave 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 when the law requires it (eg the police or courts)
n if an employee authorises disclosure in writing

record-keeping
In order to maintain confidentiality of payroll data, systems for storing
information must be secure. These include:
n the use of passwords for opening computer software programs
n not leaving computer programs open when you leave your desk
 principles of payroll 9

n the use of lockable cabinets for storing paper records

n locking the office where payroll records are kept and restricting entry
only to authorised staff (where possible)
Employee records fall into two categories:
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
n 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

n The job of payroll administrator requires the skills of accuracy and

timeliness.
Chapter
Summary

n The government department that deals with taxation is Her Majesty's

Revenue and Customs (HMRC).

n Organisations that pay employees must process their payroll on computers

that are capable of transmitting payroll information to HMRC's computers
online.

n HMRC specifies what minimum information should be kept about

employees.

n Procedures should be in place to ensure that payroll information is properly

authorised by signature of the appropriate manager.

n Payment of employees is dependent on whether the payroll is negative or

positive.

n 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.

n Positive payroll depends on the input of variable information such as hours,

pay rates or lump sums.

n Payroll information is vulnerable to fraud and unauthorised transfer of

personal data.

n Systems must ensure that information is kept securely and not disclosed to
unauthorised parties without written permission of the employee.

n Employee and payroll records must be kept for a minimum of three years
from the end of the current tax year.
 principles of payroll 11

Key HMRC Her Majesty's Revenue and Customs – the

Terms government department in charge of collecting taxes

RTI Real Time Information – the process of updating

HMRC online using computerised payroll software
on each pay day

negative payroll payroll data that repeats each pay day and does not
require additional input from the payroll
administrator

positive payroll payroll data that requires active input by the payroll
administrator for an employee to be paid

basic pay an agreed rate of pay, specified in an employee's

contract of employment, for an agreed minimum
period of time

overtime pay pay for hours that are additional to hours at basic
pay, usually paid at a higher rate

bonus a payment added to normal pay, usually as a reward

for good results or a significant event

commission performance-related pay or pay that is determined

by reference to another figure, eg sales revenue

piece rate pay for the number of units produced

Data Protection Act an Act of Parliament passed in 1998 which controls

the keeping and processing of personal data about
individuals

fraud criminal deception intended to result in financial or

personal gain
12 introduction to payroll systems

Activities

1.1 RTI stands for:

(a) Recording Timed Information.

(b) Real Time Information.
(c) Reporting Timely Information.
(d) 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) Full name.

(b) Gender.
(c) Date of birth.
(d) Full address.
(e) Next of kin.
(f) National Insurance number.
(g) Employment start date.
(h) Previous employer.

1.3 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) Joe’s colleague, Jacob, who does a similar job but has worked at the supermarket
for longer than Joe.
(b) The manager of the fresh produce department.
(c) The supermarket manager.
(d) Joe himself.
 principles of payroll 13

1.4 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.

N, P or M
(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.
(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) 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.
(f) Duncan is paid £400 per week. He is off sick for all five days that he would
normally work.

1.5 Indicate whether the following statements are true or false. Enter the letters T or F as appropriate
in the box.

True/False
(a) The Data Protection Act only applies to organisations with more than 10
employees.
(b) The names and addresses of staff can be shared with other businesses.
(c) Payroll records must be retained for at least three years from the end of the
current tax year.
(d) Fraud is when someone pretends to be someone else.
(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.
(f) Information about employees' pay can be disclosed to HMRC.