Staff costs are very often one of the largest costs for many businesses. Generally the costs associated with employing staff are deductible from the profits of the business. However there are some costs to bear in mind when you process payroll.
How to Process Payroll
Firstly business expenses must be incurred wholly and exclusively for the purposes of the business to be deductible. The cost of employing staff satisfies this requirement. These costs are mainly the wages and salaries that you process your payroll. In addition to your employees’ pay, you may also deduct national insurance contributions (NIC) and PAYE income tax deductions paid to HMRC. Employer’s NIC is also deductible. It is the legal duty of all businesses that employ staff to comply with payroll obligations and deduct PAYE and NIC and pay it to HMRC. These obligations must be taken seriously because errors made can result in large penalties and legal action. It is also crucial that payments of PAYE and NIC are paid to HMRC on time each month, as penalties are charged if payments are made late on more than one occasion in the tax year.
Benefits in Kind
When you process your payroll, in addition to an employee’s pay, their remuneration package may include alternative non-cash benefits, such as a company car or private health care. The cost to the employer for providing these benefits is also deductible from the profits of the business. Usually the employee is taxed on their benefits in kind. The amount on which the employee pays tax is the cash equivalent of the benefit. Depending on the nature of the benefit, this will not necessarily be the same as the cost to the employer of providing the benefit. However, it is the actual cost that is deducted as a business expense, rather than the amount on which the employee is taxed. You will also have to pay Class 1A National Insurance contributions unless the benefits you provide to your employees are exempt from tax and National Insurance. Talk to Prestige Business Management about exemptions and managing benefits in kind to make the most out of how you process your payroll. Any Class 1A National Insurance paid is also deductible from taxable business profits.
You will be required to process your payroll statutory payments at some point. These could be maternity pay, paternity pay, adoption pay or sick pay. The costs to the employer of making statutory payments are deductible in the same way payments of wages or salary are. Depending on the size of your business, you may be able to recover some of the costs of any statutory payments made from HMRC.
As an employer you may make contributions to an occupational pension scheme, or to the employee’s personal pension plan when you process your payroll. Pension contributions are deductible from the profits of the business, as long as they have been incurred wholly and exclusively for the purposes of the business. The deduction is given in the accounting period in which the contribution is paid. If very large, abnormal contributions are made, over £500,000 more than in the previous period, the rules require that relief is spread over more than one period.
A dividend is a reward of value, which can be paid out either as cash or in the form of additional product, distributed to the shareholders in return for their investment in a company’s equity. Usually a dividend takes the form of a payment from the company’s net profits. The majority of a company’s profits is retained within the company to fund their ongoing business. The remainder can be allocated to the shareholders as a dividend. Essentially the distribution of dividends is a transaction that transfers value to a shareholder (or related party), the terms of which are arrived at because the other party was a shareholder (or related party). Although dividends may be regarded as a staff cost there is no deduction for dividends, as they are paid out of after tax profits.
At Prestige Business Management we can help your Business
Talk to Prestige Business Management about all aspects of how to process your payroll and provide benefits in kind. Find out what we can do for you. Call us today on 0203 773 2927.