To process the payroll, for each employee, an employer must:
• calculate the gross wage or salary for the period
• calculate the income tax payable out of these earnings
• calculate the employees state benefit contributions that are deductible
• calculate any non-statutory deductions
• prepare a payslip showing the gross pay, deductions and net pay
• make the payment of net pay to the employee
• calculate the employers state benefit contributions payable to the tax authority.
For all employees collectively, the employer must:
• make the payments of all the deductions from pay plus the employers state benefit contributions to the appropriate businesses
• record the payroll costs in the accounting system.
A payslip will accompany each payment of salary or wages to an employee. It shows how the amount paid has been arrived at and how much has been deducted in relation to statutory deductions for taxation and social security. Other, non-statutory, deductions will also be shown on the payslip.
An employee receiving a payslip means that, even if the employee receives wages or salary payments directly into a nominated bank account, the employee is notified of the payment and how much it is, upon receiving the payslip. Payslips may be distributed to employees at work, posted to their home address or available via the employers secure website.
A payslip must show details of:
• gross pay
• deductions (itemised separately)
• net pay (net pay is sometimes called take-home pay).
However, there isnt a standard layout for a payslip and so payslips of different employers can look very different.
An example is shown below:
Employee:
T Cardew
Employee no.
-
NI No.
TY 45 67 78 L
Tax code:
473L
Date:
11/01/X4
Tax period:
Wk 40
PAY FOR WEEK ENDING: 11/01/X4
| Description | Hours | Rate $ | AMOUNT $ |
|---|---|---|---|
| Basic | 40.0 | 7.50 | 300.00 |
| Overtime | 5.0 | 15.00 | 75.00 |
| Shift allowance | 2 | 10.00 | 20.00 |
| GROSS PAY | 395.00 |
| Pension (Employers pension contribution $25.00) | 15.00 | Year to date $ |
| Trade union subscription | 10.00 | |
| TOTAL PAY | 370.00 | 16,605.00 |
| PAYE | 57.92 | 2,711.32 |
| Employees social security (Employers social security $36.71) | 30.85 | |
| NET PAY | 281.23 |
Most employers will have a set day on which employees are usually paid, and it is the payroll departments responsibility to ensure that wages are paid on the correct due days.
Weekly paid employees will be paid at least once a week, normally on the same day each week. Usually the pay day will be either Thursday or Friday.
Monthly paid employees will be paid once a month, and there will be a formula for determining the pay day. For example, this may be:
• the last day of the calendar month
• the last Thursday or Friday of the calendar month
• the same date each month, such as the 26th.
Employees may be paid their wages in several ways:
• in cash (but this is now less common)
• by cheque payable to the employee
• by bank giro transfer
• through the Banks Automated Clearing System (BACS).
Making payments by these methods has been described in an earlier chapter.
Payments to outside agencies, such as the tax authority, pension management companies and trade unions are made regularly by employers on behalf of employees when statutory and non-statutory deductions have been made. The supporting documentation for these payments is the payroll itself. When these payments are made, they must be recorded in the bank general ledger account.
Gross weekly wage for the employee
Tax paid to date by the employee in the tax year
Deductions paid by the employee
Details of the employees expected pension
BACS
Bank giro transfer
By cash
By cheque