Payroll Glossary: A guide to the abbreviations, concepts, and terminology of payroll

Payroll: Understanding the basics

First, what is payroll? 

Payroll is the list of employees and workers a company must pay and the amount they will receive. It’s also the total amount of salaries and wages a company pays to its employees. Managing it using payroll software can make life much easier.

The payroll function includes: 

• Calculating pay for everyone on the payroll 
• Deducting taxes and legal obligations as required 
• Distributing pay via cheque or direct deposit on schedule 
• Managing record keeping for each employee, including pay year-to-date 
• Making payroll tax payments and submitting reports on time 

Payroll abbreviations and concepts from A-Z

Apprentice minimum wage rate

While the majority of employees are entitled to either the National Minimum Wage or National Living Wage, apprentices either under 19 years of age, or 19 and over but in the first year of an apprenticeship, can be given an apprentice minimum wage.

This rate is significantly lower than the National Minimum Wage, but like the minimum and national wages, it usually increases each year.

Details can be found on the government website.

Automatic enrolment

Every employer is legally required to help its employees to save for retirement by automatically enrolling eligible workers into a workplace pension scheme and making contributions towards it.

This is separate from the State Pension offered by the government and paid for through National Insurance.

To be eligible, employees must:

• Be aged between 22 and State Pension age
• Earn over £10,000 a year
• Work in the UK

There are also employees who may not be eligible to be auto-enrolled, but who you might still need to make minimum pensions contributions for should they decide to join the pension scheme.

Compliance with automatic enrolment (also known as auto enrolment) means employers must have chosen a pension scheme, worked out who needs to be in it (such as those new to the workforce), and then communicated to staff individually to tell them how automatic enrolment applies to them. Crucially, you must also declare your compliance to the Pensions Regulator.

Employee

Employee Employment law distinguishes between employees and workers. The difference for employers lies in the rights that must be allowed to each. Employees are identified usually because you will use a written employment contract to employ them.

Employees have rights that workers aren’t statutorily afforded, such as sick pay, redundancy pay, maternity leave/pay, protection against unfair dismissal, a right to request flexible working, and more. Both employees and workers are eligible for basic rights, such as the minimum wage.

The difference between an employee and worker can be subtle, and you should seek an expert opinion if you’re in any doubt. Denying an employee rights because you believe them to be a worker could invite legal challenges and reputational damage for your business.

EPS—Employer Payment Summary

The Employer Payment Summary (EPS) is one of the submissions you might need to complete as part of Real Time Information (RTI). It’s needed instead of a Full Payment Submission (FPS) if no employees were paid in the tax month.

Alternatively, you may need to submit both an EPS and an FPS in a handful of situations, such as reclaiming statutory maternity, claiming the Employment Allowance, or reclaiming Construction Industry Scheme (CIS) deductions[GG4] . There are a few other situations where you’ll need to use an EPS too—see the government guidelines.

FPS—Full Payment Submission

Full Payment Submission (FPS) must be sent to HMRC via Real Time Information (RTI) every time you pay 1 or more employees (even if the employee is paid less than £118 per week).

It details payments and deductions. It also contains other information about your employees’ pay, and details of any starters or leavers. This allows HMRC to keep up to date with your payroll and your employees’ tax and National Insurance. It’s also used by DWP for individuals that are entitled to Universal Credit, which is why it’s vital to make sure the payroll is processed correctly and on time, otherwise it can affect employee’s UC entitlement.

FPS can only be sent using payroll software. It should be sent on or before your employees’ payday. You can send the FPS earlier than usual under extenuating circumstances, such as payroll staff taking a holiday.

There are also some situations where you can send an FPS late, but they’re very specific to certain less-than-typical issues.

If you make a mistake in your FPS, or file it early and then realise new data must be communicated to HMRC, you can typically correct this in your next FPS, although you might need to take other remedial action.

GDPR—General Data Protection Regulation

The General Data Protection Regulation (GDPR) is a data protection law that came into effect on 25 May 2018 in the European Union (EU), and which has a direct effect in all EU Member States. The provisions of the GDPR were incorporated into UK law as part of the Data Protection Act 2018 and will therefore continue now the UK has left the EU (and after the withdrawal period ends).

The GDPR’s focus is the protection of personal data, i.e. data about individuals. In fact, the GDPR is one of the biggest shake-ups ever seen affecting how data relating to an individual should be handled—and potentially it affects not just companies but any individual, corporation, public authority, agency, or other body in the EU and the UK that processes personal data of individuals who are based in the EU and the UK. This includes suppliers and other third parties a company might use to process personal data.

Considering people management and payroll involves processing large amounts of personal data, you need to make sure your processes comply with the GDPR. You should consider consolidating all your personnel and payroll data into as few locations as possible.

You should also think about adopting other relevant rules and standards, such as ISO27001, which can help you meet some of the security obligations under the GDPR. Your GDPR-compliant processes need to consider all sources of data, which can be challenging with people management.

Work out how to securely store sick notes, or emails and text messages from staff requesting holiday leave, for example. The same goes for how to securely handle and store timesheets.

IR35

If a worker provides their services through an intermediary, such as a personal services company, then they still need to pay their fair share of tax and National Insurance contributions (NICs).

To combat this, the government enacted Off-Payroll Working Rules legislation. This is often referred to as IR35. Traditionally it was up to employees to decide their status, but the rules changed to force public sector employers to decide their status.

As of April 2021, any medium and large-sized private-sector employers are also responsible for deciding if the IR35 rules apply—and potentially adding the individual to the payroll, including deducting tax and NICs at source. See our guidance about IR35.

National Insurance

National Insurance contributions (NICs) help fund a range of state benefits, such as the NHS, unemployment benefits, and the State Pension. The majority of employees pay NICs, which are deducted from their pay by employers in a similar way to income tax.

Employers are also required to make separate NI contributions for each employee. Both are calculated as a percentage of the employee’s salary.

The government requires NICs to be collected through the payroll by employers as part of the Pay As You Earn (PAYE) system, and the details must be provided by the Full Payment Submission (FPS) filings within the Real Time Information (RTI) system using payroll software.

All workers over the age of 16 must make NICs, provided they’re earning more than £242 a week. There are several National Insurance classes but most employers need only be concerned with Class 1, 1A and 1B (with the latter 2 applying to expenses or benefits provided to employees, such as company cars or health insurance). Classes 2, 3, and 4 relate to self-employed people, or voluntary contributions.

The amount of NICs paid by the employee, and by the employer for that individual, depends on the employee’s National Insurance category letter designation. Most employees are in category A. Category X can be used for employees who don’t have to pay National Insurance—if they’re under 16, for example.

Each employee’s category letter should be documented on their payslip. HMRC sets the rates and thresholds for each category every tax year. You can check the current year’s rates and tables on the government website.

Category letter and employee group

• A: All employees apart from those in groups B, C, J, H, M and Z in this list
• B: Married women and widows entitled to pay reduced National Insurance
• C: Employees over the State Pension age
• J: Employees who can defer National Insurance because they’re already paying it in another job
• H: Apprentice under 25
• M: Employees under 21
• V: Employees who are working in their first job since leaving the armed forces (veterans)
• Z: Employees under 21 who can defer National Insurance because they’re already paying it in another job.

National Living Wage

The National Living Wage is effectively an extension of the National Minimum Wage that applies to working people aged 23 and over. It is higher than the minimum wage. You must pay at least the National Living Wage to those who are eligible.

To not do so is to break the law and could invite legal action as well as reputational damage. Like the minimum and apprentice wages, the National Living Wage rate typically rises each year as stated in the government’s Autumn Budget —see the government’s website for current rates.

National Minimum Wage

Workers and employees who are at school leaving age or over must be paid at least the National Minimum Wage. There are essentially 3 minimum wage rates, defined by the age of the person: under 18, 18 to 20, and 21 to 22 . The rate typically rises each year and is set by the government in the Autumn Budget—see the government’s website for current rates.

People over 23 should receive the National Living Wage rate, while a separate rate applies to apprentices in certain circumstances. Any contract offering less than the National Minimum Wage (or National Living Wage/apprentice wage if they apply) is not legally binding, and it’s illegal to pay less if no contract exists (if you’re taking on casual workers, for example).

The individual has the right to demand and receive the minimum wage, including backdated payments. If the employer does not pay at least the correct minimum wage rate, the employee or worker has the right to take them to a tribunal. The types of workers who should get the National Minimum Wage also includes:

• Part-time workers
• Casual labourers
• Agency workers
• Homeworkers (that is, those paid by the number of items they make)
• Apprentices (although there’s also a separate apprentice rate for those under 19, or over 19 and in their first year of the apprenticeship)
• Trainees and workers on probation
• Foreign workers

This list also applies to the National Living Wage and apprentice rates.

Those not entitled to the minimum wage include company directors, volunteers, people shadowing others at work, and various other less typical categories of workers —see the government’s guidance for more details.

The minimum wages can impact a range of issues. Payroll managers will need to ensure that it’s built into any forecasting of salary costs and that you keep track of any employees and workers who might move into a different wage rate. This might also impact eligibility for auto-enrolment.

Payroll software can identify employees and workers who qualify for minimum wage, including apprentices, and ensure you always pay them enough. Intuitive solutions will know when someone has a birthday that moves them up to the next minimum wage rate, so you don’t need to manage this manually. If the employee is being paid less than the minimum wage for their age band, you will be prompted to amend the rate.

PAYE—Pay As You Earn

The government requires employers to collect their employee’s tax and National Insurance at source. This system is known as Pay As You Earn (PAYE). The money must be promptly transferred to the government, typically via a direct debit setup through the HMRC online account for the business. The details must be sent by the Real Time Information (RTI) system, via payroll software.

The amount each employee pays is, in part, determined by their tax code,  which is provided by the government, although should be checked by the employee to ensure it is correct.

PAYE Online

PAYE Online is HMRC’s online service for payroll. Registration by employers is required and you’ll need to input your PAYE Online account details into your payroll software for Real Time Information (RTI). Although you can login at PAYE Online and view details and notifications about your payroll, you can’t use PAYE Online to send payroll reports. Payroll software is required for that.

The exceptions are submitting P46(Car), P11D and P11D(b) forms—although, again, these can also be submitted via payroll software.

As well accessing PAYE Online via a web browser, you can also download and use the PAYE Desktop Viewer. This is a piece of free software offered by HMRC that lets you view, search and sort large numbers of employee tax codes and notices. Versions are available for computers running Microsoft Windows, Apple macOS, and Linux.

Payroll year end

Payroll year end is the process around submitting your final payroll report to HMRC for the current tax year, which ends on 5 April. As part of reporting the final numbers, you need to give your employees a P60 and prepare for the new tax year, which starts on 6 April.

There are 4 steps you need to take:

• Submitting final payroll of the year: You’ll need to send your final Full Payment Submission (FPS) on or before your last payday of the tax year. You’ll need to note this as your final submission for the year. If your software doesn’t allow you to do so, you’ll need to send an Employer Payment Summary (EPS) instead.
• Updating employee payroll records: You need to check that all employees’ tax codes are correct for the new tax year. HMRC will send you a P9T form for employees who need a new tax code, and a P9X form for general changes for employees whose tax code ends with “L”.
• Distributing P60s: You must give all employees on your payroll working for you on the last day of the tax year a P60. Like payslips, these are typically delivered electronically now, rather than in printed format. The P60 summarises their total pay and deductions for that year. Your payroll solution may automatically produce P60s for you. The company must provide the P60 to each eligible employee by 31 May.
• Report expenses and benefits: You need to report expenses and benefits to HMRC before 6 July, if you are not already payrolling benefits . Class 1A National Insurance due on taxable expenses and benefits are due by 22 July.

P6

More accurately called a tax code change notice, a notification will be sent to you by HMRC if an employee’s tax code changes during the tax year.

The tax code change notice is sometimes still called a P6, but this is for legacy reasons. Following receiving the notification, you should access the new tax code in the Tax Code Notices section of your payroll software, PAYE Online, or the HMRC PAYE Desktop Viewer application.

Use the details to update the employee’s tax code and include the previous pay and tax if you received these figures with the new tax code. The new code should be used from the first pay day after you receive the notification, unless you’re told otherwise.

P11

An obsolete form once required for payroll. Also called the Deductions Working Sheet, the P11 was a way of recording information about all payments and deductions you make to your employees. P11 records had to be kept if you paid an employee at the Lower Earning Limit or above, or if your employee has a tax code.

P11D

Also known as an expenses and benefits form, employers use this form to submit an end of year report to HMRC for each employee or director the company has provided with expenses or benefits. Sometimes these are referred to as benefits in kind. Examples might include company cars, health insurance, childcare, or travel and entertainment expenses.

However, the rules on reporting can be complicated. There’s also a P11D(b) form, which is used to specifically report the amount of Class 1A National Insurance contributions (NICs) that are due on expenses and benefits you have provided to employees.

P45

One of the core payroll forms, alongside the P60, P11D and Starter Checklist, that are still used even though the Real Time Information (RTI) system has made most other forms redundant.

When somebody stops working for you, they must be provided with a P45 form. This is a legal requirement. It shows how much tax they’ve paid in the current payroll year and contains other details about them, such as their National Insurance number and their address. They will then present the P45 to their new employer, or to the Jobcentre Plus if they’re seeking work. This allows their new employer to set them up on their payroll system without fuss.

There are 3 parts to a P45 . When you take on a new employee, they will give you parts 2 and 3. They will keep part 1A for their own records.

It’s best practice to get a new employee to complete the starter checklist regardless of whether they provide a P45, as the checklist includes additional information to the P45.

P60

One of the core payroll forms, alongside the P45, P11D, and Starter Checklist, that are still used even though the Real Time Information (RTI) system has made most other forms redundant.

A P60 shows how much tax, NICs, student and postgraduate loan deductions and total statutory payments received an employee has paid during the tax year. As an employer, you must give a P60 to each employee who was working for you at the end of the payroll year. This can be supplied on paper or electronically but must be provided by 31 May following the end of the payroll year on 5 April.

The P60 is one part of payroll year-end, and the 31 May deadline allows for enough time for the individual to check the details before potentially filing a tax return.

Employees need their P60s to prove how much tax they’ve paid on their salaries and make any claims, for example:

• claiming back overpaid tax.
• applying for tax credits.
• as proof of income if applying for a loan or a mortgage.

A P60 includes details of earnings and deductions, including National Insurance contributions (NICs) and tax. These are important elements required by employees. Failure to deliver P60s in the given time may lead to an investigation by HMRC.

RTI—Real Time Information

Real Time Information (RTI) was introduced in April 2013. Under RTI, employers need to send Pay As You Earn (PAYE) information to HMRC every time they pay their employees, rather than waiting until the end of the payroll year. This must be done via payroll software. RTI is used if you pay your employees weekly, monthly, or even quarterly.

There are 2 types of submissions that you’ll need to make: a Full Payment Submission (FPS) and/or an Employer Payment Summary (EPS). Typically, an FPS is all that’s required.

If you are outsourcing your payroll to an accountant or payroll service provider, you should ask them what they are going to do to help ensure your business is RTI compliant. Both employee and worker payroll details should be sent via RTI.

Shared Parental Leave (SPL)

Following the birth or adoption of a child, parents are entitled to claim up to 50 weeks of leave between them. This is known as Shared Parental Leave (SPL).

The leave can be taken in one go or staggered across a longer period in 3 separate blocks for each parent (so a potential of 6 blocks in total).

There are criteria that must be checked for acceptability for SPL, such as whether both parents share responsibility for the child at birth or adoption date , and there’s both work and pay criteria. Both parents need to be employees, and not workers.

To apply for SPL, the parents will need to complete and submit to you the SPL forms, which were created by Acas. As with Statutory Maternity Leave where employees can claim keeping-in-touch (KIT) days, those using SPL can return to work for up to 20 days during their leave without compromising their rights. These days are known as Shared Parental Leave In Touch (SPLIT) days, and as an employer you must agree to them.

Starter Checklist

The Starter Checklist should be used to gather information about a new employee. You input the details provided into your payroll system, and there’s no need to send the Starter Checklist itself to HMRC.

The Starter Checklist can be completed online, or a paper copy can be printed off for the employee to complete and return to you.

Statutory Maternity Leave

Eligible employees are entitled to take up time off for maternity. This right is afforded by the law. Also protected during the leave period are existing rights employees have such as the right to pay rises. Holiday accrual is also protected, as are redundancy rights. Statutory Maternity Leave provides up to 52 weeks.

The first 26 weeks are called Ordinary Maternity Leave. The last 26 weeks are called additional maternity leave. The employee doesn’t have to take all 52 weeks, of course, although they must take 2 weeks’ leave (or 4 weeks if they work in a factory).

Employees are allowed to work up to 10 keeping-in touch (KIT) days during the leave. Both the employee and employer have to agree to this, as well as the nature of the work. Crucially, keeping-in-touch days do not affect any of the rights afforded by Statutory Maternity Leave. Leave can start as early as 11 weeks prior to expected childbirth.

 If the baby is born early, the leave will start the day after the date of birth. If the employee is suffering from a pregnancy-related illness then it can start 4 weeks before the week that the baby is due (beginning on a Sunday).

To claim maternity leave, the employee must tell you at least 15 weeks before the due date. You can request they put this in writing, but can also accept a verbal notification. However, you must then write to the employee within 28 days confirming the start and end dates. You can request proof of pregnancy, including a letter from the doctor or midwife, or the MAT B1 certificate given to you by a medical professional.

If an employee wants to change the date they return to work, they must give you as the employer at least 8 weeks’ notice.

Statutory Maternity Pay (SMP)

Those eligible for Statutory Maternity Pay (SMP) can claim for up to 39 weeks during the leave. Typically, this begins when the employee begins their leave, but it can start automatically if the individual is off work for a pregnancy-related issue in the 4 weeks before the week the baby is due.

As an employee you may have to initiate this, potentially in the absence of the employee. Tax and National Insurance must still be deducted from SMP.

The amount you must pay is as follows:

• 90% of the employee’s average weekly earnings before tax for the first 6 weeks
• An amount set by the government, or 90% of the average weekly earnings before tax (whichever is lower), for the next 33 weeks.

The government website has a Statutory Maternity Pay calculator to work out an employee’s pay. Some worker classifications have different rules for entitlement, such as agency and educational workers, and directors.

Statutory Shared Parental Pay (ShPP)

In addition to Shared Parental Leave (SPL), new parents can claim Statutory Shared Parental Pay (ShPP) for the period of leave. This right applies to both parents of the child.

As an employer you must pay ShPP, just like with any other statutory pay. Eligible parents can claim up to 90% of their average weekly earnings for the period, or an amount set by the government, whichever is lower.

Statutory Sick Pay (SSP)

Eligible employees are entitled to at least a set amount of pay per week from their employer if they are too sick to work for more than 4 workdays in a row. This is known as Statutory Sick Pay (SSP). They can claim for up to 28 weeks. The government sets this minimum rate.

If an employee makes a claim, you must pay them from day 4 of the sickness period (the first 3 days are known as “waiting days”). The exception is where the claim is a further period of sickness within 56 days of a prior period. This is known as a linked period and payment is due from the first day of the linked period. Tax and National Insurance contributions (NICs) are deducted from this pay.

To be eligible, the individual needs to be an employee rather than a worker and have done some work for you (that is, new employees can’t claim before their start date). Employees need to be earning an average of the Lower Earnings Limit per week.

If the employee has already claimed the maximum amount of SSP (28 weeks in a work year) then you do not have to pay them SSP. Additionally, if they’re already receiving Statutory Maternity Pay then they cannot also claim SSP.

You can ask the employee to provide a note from a health professional if they’re off sick for more than 7 days in a row, including non-working days (weekends). A doctor can provide a fit note (known anecdotally as a sick note), while you might also choose to accept an Allied Health Professional Health and Work Report from another health professional, such as a physiotherapist, podiatrist or occupational therapist.

As an employer, you can offer more through your sick pay scheme, but it’s illegal to pay less. See our guidance on SSP.

Tax codes

Tax codes are part of the Pay As You Earn (PAYE) system, and are used to calculate how much tax to deduct from an employee’s pay. When you hire someone, you use their P45 to determine their tax code and your payroll software should be able to help you work this out. You usually need to update tax codes at the start of a new tax year.

Additionally, HMRC will send you an email notice when an employee’s tax code changes and needs to be updated. You should make these updates as soon as possible.

Tax codes are made up of numbers and letters. The numbers show how much personal allowance an employee is eligible for in that tax year.

In most cases, the total amount of taxable income is the number in the tax code multiplied by 10. For example, an employee with the tax code 1250L can earn £12,500 before being taxed. The letter references their personal allowance and how tax is deducted.

The full list of tax codes and their meanings is on the government’s website.

Worker

Employment law differentiates between workers and employees.

Workers are identified usually because you there is a contract that states the work or services they must do for you, but this doesn’t have to be written contract, as with an employee. Often, workers undertake casual or irregular employment.

Workers get some of the same rights as employees, such as receiving the minimum wage, and a statutory level of paid holiday. However, they usually don’t have the right to a minimum notice period, protection against unfair dismissal (or statutory redundancy pay), the right to request flexible working, or time off for emergencies.

The difference between an employee and worker is subtle, and you should seek an expert opinion if you’re in any doubt. Denying an employee rights because you believe them to be a worker could invite litigation.

Avoiding payroll mistakes

Quality assurance is vital to payroll performance. Mistakes will happen. Your job is to ensure systems are in place to reduce errors where possible and quickly correct mistakes as they occur.

Common errors in UK payroll are: 

• Your PAYE bill doesn’t add up 
• Mistakes with your full payment submission (FPS) or employer payment summary (EPS) 
• Paying HMRC an incorrect amount
• Incorrect employee payments and/or deductions