Every employer has a legal responsibility to operate a paye scheme for its employees with regular payslips a P60 end of year certificate and a P45 showing details of gross pay and income tax deducted during the employment if you leave. An employer needs a paye system that satisfies both the payroll requirements for each employee and the additional paye records required by the Inland Revenue.

Calculating gross pay is not difficult as the rates and hours are usually preset or subject to known information such as a timesheet for example. Calculating the income tax and national insurance can present problems to employers inexperienced in payroll matters who are not familiar with all the paye requirements. Payroll software automates this income tax and national insurance calculations reducing both the time and knowledge required.

Each new employee joining a business must provide the employer with a P45 which contains specific essential information that employer needs to start the paye system for that employee. The P45 contains details of the employee name and address, previous earnings and the amount of income deducted by the previous employer. The P45 also states the employee tax code and any special conditions that may have been in force such as being deducted tax on a week one or month one basis.

P45 details are required by the new employer to set up the payroll records for each employee. Rather than filing the P45 under a pile of papers or the back of a drawer a payroll software solution adds discipline to this process and permits a permanent record to be kept which can prevent serious administration issues in the future. Documents and notes on scraps of paper can get lost while paye details kept on a proper payroll software package rarely do and can be backed up as required.

The P45 does not contain details of national insurance contributions as the new employer does not need to know what the previous national contributions were. This is because national insurance contributions are always calculated on a week by week or month by month basis and so previous deductions are not relevant while previous details of income tax deducted are relevant because income tax is deducted on a cumulative basis.

Having established the employee records the main work of the paye system begins. Each pay period the employer needs to calculate the income tax and national insurance to be deducted. This can be done manually or the employer can laboriously enter the employee and previous pay details into a paye calculator to obtain the information. Payroll software is a better choice by automating these calculations saving time and providing accuracy.

The paye system also requires the employer to keep accurate records of the breakdown of the calculation which are recorded on a P11 deductions working paper. This part of the paye administration is a burden for many small employers and payroll software can automate this task saving hours of work during the year.

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