What is a Payroll?

What is a payroll?

Payroll is one of those words whose meaning can depend on context. The formal definition of a payroll is the list of people that are paid by a company for their work; basically a list of the employees. The word is often used in different ways. People might get in touch with payroll with a salary query, using it as a synonym for department. Other’s may say someone is on the payroll, hinting at the original meaning to say someone is employed.

In practice, most people will have no contact or involvement in the actual payroll. This list will be confidential and guarded by Human Resources or a finance department’s treasury function. Most people’s only interaction will be their payslip. This is used to illustrate the broader function of the payroll.

What’s on a payslip?

Whether a payslip is physical or online; it will usually contain much of the information that is held on the payroll. Perhaps surprisingly, this not all legally required. While most payslips will feature details like National Insurance numbers, tax codes and pay periods, and year-to-date figures, these are optional.

A payslip must, however, include details of the gross pay, details of any deductions, like tax and national insurance, and the net pay: the amount left after deductions. If pay is based on work, an hourly rate, for example, it should include details of the amount of work being paid.

What else does payroll do?

Moving beyond the payroll as a simple list, the deductions hint at the additional work involved in managing a payroll. Deductions like tax and National Insurance can be complicated, with the employer having to calculate the liability for employees. These can frequently change, requiring adjustments for things like pay changes, employment changes or any unpaid periods, which will all affect tax liability.

There are many other deductions that will affect the net pay and tax. For example, pension contributions, which can be tax-free. There might be other payments going out, an employee might have taken advantage of a bike-purchase scheme, which they repay through salary but is tax-free. But they might also have a season ticket loan they also need to repay, which will not be tax-free.

On top of this, there will be other deductions and payments that need to be calculated. From student loans to union fees, or additional payments for extra work or responsibilities.

What is a payroll department?

While very few companies formally call it a payroll department, they will have a person, or people, depending on size, who are responsible for calculating and making the payments to staff. The complexity of this means they are often specialist staff who will know the relevant legislation and best practice, and confident in dealing with what can become very complicated arrangements.

The role can be very sensitive, since it deals with people’s pay and mistakes can have significant impacts on individuals. As a consequence, many companies opt to outsource the payroll functions, using an external provider to manage their salary payments. Even those that do not outsource will tend to have external experts, frequently accountants, they can call on to help with the tricky calculations and assessments they have to make.

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Jason Scholey