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Principles Of Payroll Systems

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.

  • 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.


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.

The choices available to employers (depending on their size) are:

  • 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.


As a legal minimum you must record the following information for each employee:

  • full name (including a middle name if there is one)
  • gender (male or female)
  • date of birth
  • 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.


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:

  • changes to pay rates or status (e.g. through promotion)
  • changes to hours worked
  • change of pay frequency
  • changes to employees’ personal details (e.g. marital status, home address, bank details)
  • voluntary deductions to be added (e.g. 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, e.g. 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 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:

  • 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.

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.

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:

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